Equities are finally playing catch up. The elastic band snapped and stocks were catapulted higher. The big question, of course, is can the collapsing commodities party continue? There are, perhaps for the first time in a while, a number of reasons why commodities are selling off. Let’s have a look at them.

Those Pesky Speculators are Being Spanked

A quiet data revision that has boosted the number of oil futures contracts U.S. regulators think are held by speculators is raising eyebrows. The revision means that “speculators” controlled 48 percent of the open interest in NYMEX crude oil futures and options as of July 15, compared with just over 38 percent before the revision.

This changes the whole way you look at the recent moves in this market.

I’m not going to get into the why’s and wherefores of the revision but, to cut to the chase, it now appears that a lot of contracts are being held by just one trader. Whats more, this was a very special trader with an enormous concentration of positions in crude oil (amounting to perhaps 460 million barrels). When this kind of information comes out, the market smells blood and can take the opposite side of the trade hoping to flush out someone with a long position who is about to be hit with a margin call.

And then there is China’s demand which seems to be creaking.

Is China Set For a Post Olympics Hangover?

The New York Times reports that demand for commodities in China is slowing down — dropping from 11% to 9%, and this could be contributing to the plunge in commodity prices. This could lead to more failed hedge funds and be painful for many companies. But it would be great for consumers.

The Times reports that Chinese factories reported “a plunge in new orders last month. Exports are barely growing. The real estate market is weakening” And it suggests that slowing Chinese factory demand is leading to price drops in commodities including gasoline, copper, tin, zinc and aluminium.

Three examples from the Times illustrate the effects of the slowdown:

• Luggage. Union Bags, a Chinese luggage maker, said sales to the U.S. had “dropped 20 percent in the last year.”

• Cars. Automobile demand in China is growing more slowly. “J. D. Power and Associates cut its forecast for car sales in China this year to 5.95 million — still up from 5.42 million last year, but much less of an increase than the company’s previous forecast of 6.2 million.”

• Real estate. China’s real estate bubble seems to be bursting. In Shenzhen, “residential real estate prices dropped by 10 percent over the last year in desirable neighbourhoods … and nosedived by up to 40 percent in outlying areas.”

SemGroup might be the first commodity trader to perish in the wake of tumbling prices. It will be interesting to see whether others follow.

Falling commodity prices would be good for consumers. However, if Chinese demand drops, Chinese companies may no longer have the urge to buy from big U.S. exporters – so the share price of those US exporters could suffer.

And finally, there’s the oft-made point about demand destruction in the U.S. This is the driving season Stateside, but figures released by various government departments indicate a dramatic drop in the number of miles driven by American drivers thus far this summer.

Steady As She Goes: The Fed Are Loath To Rock The Boat

The Federal Reserve has rightly been worried that the economy may be both too hot and too cold at the same time. But today, the Fed leaned toward the recession side of the worry ledger . They left the federal funds rate at 2%, with only one dissenting voice (Fisher) this time.

In an innocuous statement announcing the decision to keep rates as is, the Fed said that “Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the committee.”

So both inflation and a serious recession are still cause for concern. But in leaving rates alone, the Fed announced that low or negative growth rather than an inflationary spiral is now the main problem. On balance, a more dovish statement than expected.

There are good reasons to focus more on growth rather than inflation. The price of oil is falling and talk of a global slowdown is building. On top of that, the labour unions don’t have much clout, so a price-wage spiral is unlikely to occur. That may lead to the Fed being on hold ’til 2009!

Skinny Snippets: UK News, Bring Your Umbrella

UK Nationwide Consumer Confidence collapsed to 51 in July from 62, marking both the steepest fall and the lowest level in the survey’s (albeit short) history. Meanwhile, the NIESR estimate of GDP growth came in at 0.1% in the three months to July versus 0.2% previously, and demand for permanent staff amongst firms fell to a seven year low according to a survey compiled by KPMG.

UK press reports suggest that repossessions of homes have risen 40% since the start of the slowdown in the industry last year. Chancellor Darling is now said to be drawing up a set of proposals to prop up the sector with a focus on first home buyers.

Data On The Radar
There is nothing worth getting out of bed for.

Equities: Ignoring the Pessimism for Now

This morning Commerzbank and BNP Paribas SA led banks higher in Europe.

Lonmin Plc surged 49 percent after Xstrata Plc bid $9.8 billion for the world’s third-biggest platinum producer.

Ryanair Holdings Plc gained in Dublin and Toyota climbed in Tokyo as oil fell for a third day.

Cisco Inc. jumped in German trading after its forecast reassured investors.

This afternoon, Freddie Mac report (before US market open) and yesterday’s star performer AIG (after close of US market) will report.