Written by: Andre Marshall, CEO Crunch Risk, LLC

Financial Markets

The European Credit Crisis is like a like a train wreck, the train applied it brakes a long time ago but it takes the train 3 miles to stop once the brakes are applied, and so we get to see this train wreck in slow motion. We know what the carnage will look like because the U.S. went through its train wreck in 2008/2009. Europe should have done so at the time as well, but the European governments chose to paper over the glaring holes in their balance sheets instead focusing on some Stress Test light applications to their banking sector. Now that the governments are starting to fall - Greece, Italy … The entire financial system there is not equipped to handle the magnitude of this debt repayment from this patchwork of unimpressive financial countries under this umbrella of a currency called the Euro.

The Euro is almost certainly headed to parity with USD if it can even survive that long. The politics are slow moving, the debt is impressive and time has now run out. As a result our financial markets have shed 7.2% in less than 2 weeks, and may not yet have even found a temporary bottom, as investors , fearing the worst, are in the process again of “risk off”. Everyone will be watching this week’s debt auctions by Italy, Spain and France. Last week’s were poorly received. Focus will be on whether these auction will fare worse or the same.

NYMEX HR Steel

Options will start on Hot Rolled on December 11th. The next iteration of a futures market. Usually options are started when a market has more liquidity, but in this case options may be more useful to participants than futures in the U.S steel industry and may in fact help liquidity of the underlying contracts. Options will provide Average Monthly settled Calls (the right to Buy) and Puts (the right to Sell). The CME also continues to work diligently to start a scrap contract or contracts, No 1 Busheling, HMS No 1, or Shred. All this may still seem foreign to the U.S. steel community, but considering that the largest futures contract in the world is now a steel contract (Chinese SHFE Rebar – some $4bln dollars/day), it’s only a matter of time before steel futures will be commonplace instruments for that average buyer or seller of steel in North America. For some it already is.

With Thanksgiving, the market has been a little dis-jointed. The spot increases have definitely given pause to the sellers who have backed off on levels. The forward curve now is pretty flat, but except for some Q1 business at $690/5 area HR has not traded at the new higher levels. The forward curve is offered at $710 from January on and would require a price close to that to get any volume done. Of any of the months, the weakest expectation is for Q2 as many believe the price increase will cause a price rise to some degree into the beginning of the 1 Quarter, but beyond that the opinions diverge completely. Many believe volume will not be sufficient to allow prices to remain and so there is some interest to sell the 2nd Quarter, more so than the 1st Quarter. The 2nd half is either good value at $710, if you think the market will sustain an upward trajectory or very expensive if you think we’re headed lower again. It is this authors view that if we do fail to maintain an upward price direction, that the new lows thereafter will be lower than the last lows. The world looks like it’s on the brink of collapse, but for now prices will rise, because perception recognizes inventories are low, demand is steady, scrap is still a desirable export commodity, and the emerging markets, which import most of our manufactured exports, are still grow albeit more slowly.

LME Billet

The market continues to trade either side of $525/540. Cash and 3’s are trading flat. This market is quiet, and will continue to be so until this long-holder situation is resolved. Then and only then will participants come back into the billet market and that will be only once Turkey’s demand improves. With Turkey so dependent on Europe, it could be a while before we see any volatility in Billet again. Until then it will continue to lose open interest as position holders manage existing positions.