Yesterday stocks were sluggish, despite the broad based drop in commodity prices yesterday. Weaker-than-expected Eurozone Sentix Index and collapsing Spanish consumer sentiment set the mood for the day early doors. Then disappointing second quarter earnings by HSBC (who see weakness of 2009 in emerging markets) and the negative news-flow on Wachovia (an analyst recommendation to take profits) triggered fresh selling in equity markets.

New York (NYMEX) crude oil futures dipped below $120 today for the first time since May.
Furthermore, Bloomberg reports that “Plunging prices for cocoa, natural gas and sugar are sending the Reuters/Jefferies CRB Index of 19 commodities to it biggest one-day decline since March.”

Bloomberg cites the slowing U.S. economy, rising inventories, and prospects for improved production of various commodities for the broad-based declines.

Of course commodity trading is highly volatile, and this may just be a slight retrenchment before the upwards march resumes. On the other hand could the commodity bubble be deflating? There must be financial players in the commodity market getting squeezed by their $20 plus loss in current crude oil contracts. If the margin calls start coming, we may see further sell-offs. Indeed one of the reasons behind the sell off yesterday was rumours of a large commodities hedge fund about to go bust.

A simple observation: the last commodity sell-off of this magnitude in March 1980 unfortunately did little to the severe 1980 and 1981/1982 recessions. Nonetheless, this commodity sell-off may help corral inflation and eventually allow central banks the luxury of again easing interest rates to help stimulate economic activity.

Is the Next Wave About To Hit The Beach?

Here’s a scary story from the New York Times. “The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building. Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

The mortgage troubles have been exacerbated by an economy that is still struggling. Reports last week showed another drop in home prices, slower-than-expected economic growth and a huge loss at General Motors. On Friday, the Labor Department reported that the unemployment rate in July climbed to a four-year high.”

Skinny Snippets:

From the White Times this morning

“Gordon Brown is considering suspending stamp duty in an emergency measure to kickstart the housing market, it was claimed last night. The idea, being worked on by the Treasury, is part of a package of help for hard-pressed families. Details passed to The Sun suggested that buyers at all levels would avoid paying the tax, which has brought in £31.5 billion over the past ten years.

Stamp duty is paid by property buyers, and is levied at 1 per cent for houses between £125,001 to £250,000, 2 per cent for £250,001 to £500,000, 3 per cent for £250,001 to £500,000 and 4 per cent for £500,001 or more. Officials will present their findings to the Prime Minister when he returns from the Olympic Games closing ceremony at the end of the month.

Figures last month showed that stamp duty receipts were being hit especially hard by the credit crunch. The downturn means not only that house prices are falling but also that fewer homes are changing hands. The Chancellor hinted in an interview last month with The Times that changes to stamp duty were possible. “Stamp duty is always a factor when people buy and sell houses but we need to make sure that we support the financial system too” he said. The Tories have pledged to abolish stamp duty for most first-time buyers.”

And Northern Rock is set to announce that it has made bigger-than-expected losses of £500m in the six months since being nationalized, according to the BBC.

Australia’s central bank signaled it may cut borrowing costs for the first time in almost seven years as slowing economic growth cools inflation. “With demand slowing, the board’s view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing” said governor Glen Stevens

Data On The Radar:

We get the FoMC rate decision tonight at 19.15. No change expected of course but the accompanying statement may be a bit more downbeat due to the woes at Fannie & Freedie & the grim economic data we’ve had since their last get together.

Before that we get the service sector PMI reports from the UK and Euroland.

Equities. The Song remains the Same

Societe General, France’s second-largest bank, reported a 63 percent decline in second-quarter profit after writedowns linked to subprime led to a loss at the investment-banking unit.

Mitsubishi UFJ, Japan’s biggest bank by market value, posted a 66 percent drop in first-quarter profit and missed analysts’ estimates, as bad-loans costs soared.

Swiss Reinsurance, the world’s second-largest reinsurer, said profit dropped 53 percent after 362 million Swiss francs ($345 million) of writedowns related to credit-default swaps.

China Development Bank is competing with Commerzbank AG to buy Allianz SE’s Dresdner Bank.

Mining stocks will of course be under the pressure today on the downward spiral in commodity prices.

But please look before you take THAT leap.