Tuesday, April 28, 2009

The royal battle - fundamentals vs outside markets

I couldn’t have had a better weekend all my footy teams won – the Wests, Tigers, Western Force and Fremantle – this is about as rare as a sighting of Halley’s Comet.I also managed to flee from the city with a few mates to Margaret River. We had a fantastic time – Margaret River definitely beats its SA counterpart. But I would have to say it’s progressing in its Greenies status; I had to pay 10c for a plastic bag at the supermarket – will have to remember to take a hessian bag down there next time.

Whilst in Margaret River I rediscovered how I am becoming more and more like my grandfather/father interrogating the locals about goings on. I was amazed chatting to a property guy who made me realize how hard the GFC has hit this region. A mate of his had 8 beachfront properties to sell in this area and thought he would get $4m pre-crash - he sold it the other day for $1.2m. The land alone would have cost that 6 months ago. It should make you feel a little better when wheat prices drop a bit ($10/t).

Even thing seems like a battle at the moment. But without knowing it we have a front row seat in a royal battle – the battle between fundamentals and outside markets for ascendency in grain markets. Last week was a perfect example. Worries over production in Sth America, the US Southern Plains and now the EU combined with better than expected profit announcements by major US banks pushed soybeans to six month highs. But before markets could celebrate and consolidate at higher levels, prognistations about rising debt levels from some of these banks, brought the sobering reality that the US banking system (the lifeblood of the US economy) is far from out of the woods.

Some leading growth indicators for the US economy suggest the period of negative growth will extend while market rumors were rife that an unofficial US Gov’t stress test revealed that only 3 out of 19 US banks are still solvent. What this week’s market rumbles did was give us a fleetingly look at the $A below 70USc (see inside for full analysis and strategy).

Our market view remains that global growth will recover in the second half of ‘09 and help support improved commodity demand. At the same time markets will realise they need to treat food commodities differently and this will combine with the reality that we haven’t produced enough to lift prices higher. The risk to this view is that this coincides with a period of $US weakness ($A strength), that wipes out many of the expected gains.

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