Ten Year Bond

Volatilty

S&P

Dow Jones Wednesday – 350 point drop in first15 minutes

The stock market’s sharp correctionculminated last Wednesday morning sending the Dow to the lowest point sinceFebruary.  US Ten year interest ratesbegan slipping early Wednesday morning after a disappointing retail salesreport was released.  Once the stockmarket opened, ten year rates collapsed to 1.85% from 2.2% in a 15 minuteperiod while the stock market plunged 350 points in the same time.  Volatility peaked at 31 percent at 3:15 pmthat day.  Dovish statements made by StLouis Fed president Bullard calmed markets Thursday morning leading to a sharpthree day rally and relatively calmer financial markets.

Volatility is characterized byeras.  (See Volatility Index below)


The activity of last week and sharpspike in volatility must raise eyebrows as it shows the underlying leverage andrisk built up in financial markets.  Asyou can see, that was a pretty healthy spike showing investor’s needs forinsurance and liquidity and their willingness to pay up for it.  It is safe to expect more volatility.

Last week, CRU printed: US $647 -4,Germany $497 +3, Italy $483 +2, China $465 +7 (all in short ton).  Differentials still remain extremely elevatedranging from $93 – $200 with Chinese CRC at -$198.  TSI daily prices did the following WOW: USHRC prices 648 -8, NE HRC €423 +1 ($489.59/st +6.2), ASEAN 501 +4($454.41 /st +3.6)and Turkish Scrap 334 -8. 

Platt’s has HRC at 648 -2, whileFlacksteel.com has HRC down 5 to 640.

For the week, the IODEX was up 0.62%to 81.00 while the 3 month was almost unchanged, up 0.02% to 80.08.   Lastweek’s early rally to 84.00 proved short lived.

After the market rebounded from itslow, steel Stocks also recovered heading into Friday.  Prices did the following: X 3.32% to $33.63, MT3.16% to $12.40, AKS 2.94% to $6.30, NUE 2.46% to $49.91 and STLD 5.56% to $21.06. Iron ore miners also rebounded with VALEup 0.37% to $10.94, BHP 5.94% to $59.04, RIO 4.57% to $49.93 and CLF 19.40% to$8.74.   

Zinc was down 2.77% to 2,244.50.  Gold was up 1.42% to 1,239 and silver was flat0.16% to 17.331.

Crude oil got as low as 79.78, butthen stabilized to being only down 3.58% to 82.75 while natural gas was down 2.41%at 3.766.

Currencies:  The dollar index was down 0.93% to 85.11. Theyen (0.72% to 106.88) and Euro (1.05% to 1.2761) strengthened while emergingmarket currencies were mixed with Turkey (1.82% to 2.2459) the only currencywith a move in excess of 1%. The ruble also continued to depreciate down 0.69%to 40.6456.

The sharp move in the dollar over thepast in the last 90 days has led to currency differentials ranging from $20 toas much as $110 wrt HRC prices.  SeeCurrency tab for one and three month changes.

Demand for safe haven assets led lowerten year rates for in the US (-3.81% to 2.19%)and Germany (-3.16% to 0.86%),although those numbers don’t tell the whole story, while Spain (4.98% to 2.17%)and Italy (7.49% to 2.5%) saw their ratesincrease.  Chinese short term ratesincreased 1.71% to 2.98%.


Economic Releases

The October Philadelphia Fed came in at 20.7,beating estimates of 19.8. However, the October Empire Manufacturing Index camein 6.2 greatly underperforming estimates of 20.4.

US Industrial production saw an increase of 1%in September (beating estimates of 0.4%), while Capacity utilization was 79.30%for the same month, slightly beating estimates of 79.00%.

August business inventories grew 0.2%,underperforming estimates of 0.4%. While retail sales in September were down0.3% and down 0.2% excluding auto (versus estimates of -0.2% and 0.3%respectively). The producer price index fell 0.1% versus estimates of 0.1%growth for the month of September.

Housing starts in September beat estimatesslightly coming in at 1.017 million annualized (estimated to be 1.013 million annualized).However, building permits slightly underperformed estimates coming in at 1.018m versus a 1.030 estimate. Finally the NAHB Housing Market Index was 54 for themonth of October, down from estimates of 59.

 

I currently have the following upside anddownside risk for HRC prices:

Upside Risks:

        NEW – Russianduties effectively eliminating Russian HRC imports
        Price Hike
        Sharp drop inimport data
        Trade Case Rumors
        Unplanned outages
        Continuedimproved demand
        Infrastructurebill/long-term solution to highway spending bill

Downside Risks:

        Dollar Strength
        Continued weakiron ore and global finished steel prices
        Weak ore leadingto weak scrap and pig iron prices
        Year-endinventory destocking
        High productionlevels
        Import tons
        Economicdownturn, especially in China or Europe reverberating to U.S.A.
        Weak demand inhousing or automotive