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For the week beginning Monday, November 7 th

Nonferrous metals remained under pressure at the start of the week due to continued worries about the debt situation in Greece and, increasingly, Italy, coupled with mounting concerns about another recession in Europe. In London, Reuters reports that official LME 3-mo. copper opened lower today at $7,805/mt, as did official 3-mo. nickel ($18,680/mt), lead ($1,999/mt), zinc ($1,926.50/mt), and tin ($21,925/mt), while aluminum firmed to $2,142/mt.

In New York, commodity prices opened mixed, with COMEX December copper off a couple of cents to $3.53/lb. this morning, while gold prices rose to multi-week highs around $1,785/to. Oil prices also firmed, with NYMEX crude for December delivery up over $95/bbl this morning.

On Wall Street, the on-going drama in Europe continued to weigh on investor sentiment, with the Dow Industrials down nearly 1/2 percentage point late this morning as the Euro weakened to $1.374. The economic releases in the U.S. are scheduled to be relatively light this week, with new figures due out on consumer credit, trade, weekly unemployment claims, wholesale inventories and consumer sentiment. Europe will remain the focus of attention as Greece attempts to get its political house in order and Italy faces a budget vote on Tuesday.

After recent travel to China and Europe, we here at the Friday Report are back on schedule and will have all the latest economic, commodity and scrap market highlights, including the most recent U.S. scrap export figures in this week’s report, which comes out on Friday.

Guest Blogger: Kenneth Rogoff Amplifications blog http://blogs.reuters.com/amplifications/ Why the Euro Needs to Fall

Although I appreciate that exchange rates are never easy to explain or understand, I find today’s relatively robust value for the euro somewhat mysterious. Do the gnomes of currency markets seriously believe that the eurozone governments’ latest “comprehensive package” to save the euro will hold up for more than a few months?

The new plan relies on a questionable mix of dubious financial-engineering gimmicks and vague promises of modest Asian funding. Even the best part of the plan, the proposed (but not really agreed) 50% haircut for private-sector holders of Greek sovereign debt, is not sufficient to stabilize that country’s profound debt and growth problems. So how is it that the euro is trading at a 40% premium to the US dollar, even as investors continue to view southern European government debt with great skepticism? I can think of one very good reason why the euro needs to fall, and six not-so-convincing reasons why it should remain stable or appreciate.

Let’s begin with why the euro needs to fall. Absent a clear path to a much tighter fiscal and political union, which can lead only through constitutional change, the current halfway house of the euro system appears increasingly untenable. It seems clear that the European Central Bank will be forced to buy far greater quantities of eurozone sovereign (junk) bonds.

That may work in the short term, but if sovereign default risks materialize – as my research with Carmen Reinhart suggests is likely – the ECB will in turn have to be recapitalized. And, if the stronger northern eurozone countries are unwilling to digest this transfer – and political resistance runs high – the ECB may be forced to recapitalize itself through money creation. Either way, the threat of a profound financial crisis is high. Given this, what arguments support the current value of the euro, or its further rise?

First, investors might be telling themselves that in the worst-case scenario, the northern European countries will effectively push out the weaker countries, creating a super-euro. But, while this scenario has a certain ring of truth, surely any breakup would be highly traumatic, with the euro diving before its rump form recovered. Second, investors may be remembering that even though the dollar was at the epicenter of the 2008 financial panic, the consequences radiated so widely that, paradoxically, the dollar actually rose in value. Although it may be difficult to connect the dots, it is perfectly possible that a huge euro crisis could have a snowball effect in the US and elsewhere. Perhaps the transmission mechanism would be through US banks, many of which remain vulnerable, owing to thin capitalization and huge portfolios of mortgages booked far above their market value.

Third, foreign central banks and sovereign wealth funds may be keen to keep buying up euros to hedge against risks to the US and their own economies. Government investors are not necessarily driven by the return-maximizing calculus that motivates private investors. If foreign official demand is the real reason behind the euro’s strength, the risk is that foreign sovereign euro buyers will eventually flee, just as private investors would, only in a faster and more concentrated way. Fourth, investors may believe that, ultimately, US risks are just as large as Europe’s. True, the US political system seems stymied in coming up with a plan to stabilize medium-term budget deficits. Whereas the US Congress’s “supercommittee,” charged with formulating a fiscal-consolidation package, will likely come up with a proposal, it is far from clear that either Republicans or Democrats will be willing to accept compromise in an election year. Moreover, investors might be worried that the US Federal Reserve will weigh in with a third round of “quantitative easing,” which would further drive down the dollar.

Fifth, the current value of the euro does not seem wildly out of line on a purchasing-power basis. An exchange rate of $1.4:€1 is cheap for Germany’s export powerhouse, which could probably operate well even with a far stronger euro. For the eurozone’s southern periphery, however, today’s euro rate is very difficult to manage. Whereas some German companies persuaded workers to accept wage cuts to help weather the financial crisis, wages across the southern periphery have been marching steadily upwards, even as productivity has remained stagnant. But, because the overall value of the euro has to be a balance of the eurozone’s north and south, one can argue that 1.4 is within a reasonable range.

Finally, investors might just believe that the eurozone leaders’ latest plan will work, even though the last dozen plans have failed. Abraham Lincoln is credited with saying “You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.” A comprehensive euro fix will surely arrive for some of the countries at some time, but not for all of the countries anytime soon. So, yes, there are plenty of vaguely plausible reasons why the euro, despite its drawn-out crisis, has remained so firm against the dollar so far. But don’t count on a stable euro-dollar exchange rate – much less an even stronger euro – in the year ahead. This piece comes from Project Syndicate

ISRI Spec of the Week: From ISRI’s Scrap Specifications Circular 2011, Guidelines for Ferrous Scrap: 219 Machine shop turnings. Clean steel or wrought iron turnings, free of iron borings, nonferrous metals in a free state, scale, or excessive oil. May not include badly rusted or corroded stock.

****** Monday’s Musing: A compromise is an agreement whereby both parties get what neither of them wanted.