Broken News ( Daily Update )

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Written by Kathy Lien, Chief Strategist

• 3 Reasons Why the Euro Weakened
• Is the British Pound Making a Near Term Bottom?

US Dollar’s Recovery Does Not Equal a Bottom
We are finally seeing cohesive price action in the currency markets as the US dollar recovered against every major currency. Stronger economic data has curbed expectations for a 75bp rate cut, leaving 50bp of easing the only realistic possibility. Unlike producer prices, consumer price growth was stronger than expected last month with the annualized pace of core prices rising from 2.3 to 2.4 percent. Industrial production was flat and net foreign demand for US securities increased $90.9 billion in November. Although both numbers represented a slowdown from the prior month, they soundly beat market expectations. Even the Beige book report contained silver linings. The various Fed districts acknowledged the weakness of holiday sales, but on balance, they all felt that economic activity has increased modestly and the labor market remains tight. With this in mind, it will certainly be interesting to see if Federal Reserve Chairman Ben Bernanke shifts his tone at tomorrow’s Congressional testimony. The last time he spoke, Bernanke was decidedly bearish, triggering a sharp sell-off in the US dollar. In addition to the comments from the Fed Chairman, we are also expecting housing starts, building permits and the Philadelphia Fed manufacturing index. These are the most vulnerable sectors of the US economy which suggests a slim chance for dollar positive numbers. Although we still believe that the US needs a 75bp rate cut, Bernanke lacks the shock factor of some of his predecessors which means that 50bp is all that we will most likely get. However even if 50bp is under delivering, it is important to realize that this would take US rates down to 3.75 percent, which is 25bp less than the Eurozone’s interest rates and 50bp less than Canadian rates. Therefore when the “cross” happens, we could actually see the EUR/USD rally and USD/CAD sell-off as funds that only hold interest bearing positions readjust their exposure.

3 Reasons Why the Euro Weakened
This morning, the Euro fell 200 against the US dollar pips in less than 2 hours and remained weak throughout the US trading session. The lack of breaking news at the time made it difficult to pinpoint one single factor that drove the currency pair lower. Instead, we attributed the move to a combination of developments. The most widely credited reason for the selloff was the dovish comments from ECB member Mersch. He said that the Euro’s gains were dampening growth and he urged the ECB to be cautious given uncertainties and look through temporary inflation jumps. The biggest reason why his comments were so important is because Mersch is traditionally a hawk, which means that he has shifted his stance. Although this is a factor for the Euro’s decline, we are not sure if his language was strong enough to warrant a 200 pip slide, especially since ECB member Weber reiterated his hawkish comments an hour before Mersch spoke. Strong US economic data is the second reason why the Euro dropped. The third is a fall in commodity prices, which could soften the blow to US consumer demand in the coming months and reduce the pressure on the ECB to raise interest rates. Tomorrow, we are expecting the ECB’s monthly report and the Eurozone Trade Balance. None of these numbers should be particularly market moving.

Visit the Euro Currency Room for resources dedicated specifically to the Euro.

Is the British Pound Making a Near Term Bottom?
Although the British pound ended the US trading session flat against the US dollar, the currency pair recovered strongly against the Euro, Japanese Yen and Swiss Franc. UK jobless claims dropped more than expected in December while earnings including bonuses held steady. This is encouraging for the pound because it suggests that the financial sector troubles have not translated to massive layoffs in the UK. The RICS house price balance was the weakest since the early 1990s house price crash but the problems in the UK housing are already priced into the British pound. There are no UK economic numbers due for release over the next 24 hours which suggests that a further bounce may be possible. Our Technical Analyst Jamie Saettele believes that we will see an explosion higher in the GBPUSD. Read our GBPUSD Bottom Report for more details.

Visit the British Pound Currency Room for resources dedicated specifically to the Euro.

Australian, New Zealand and Canadian Dollars Continue to Weaken
Broad dollar strength and falling commodity prices have pushed the Australian, New Zealand and Canadian dollars lower. New Zealand consumer prices rose by 3.2 percent on an annualized basis in the fourth quarter, which was stronger than expected, but that has failed to lift the Kiwi. Australia will be releasing its labor market report this evening. Although it may be difficult to match the healthy numbers reported in November, we still believe that Australia will report solid job growth. Later in the day, Canada will be releasing their report of international securities transactions. Foreign purchases of Canadian securities dropped significantly in the month of November, so a rebound is expected.

Tell us what you think on the Canadian dollar Forum.

Carry Trades See Sharp Intraday Reversal
Sharp volatility in the stock market has triggered sharp moves in carry trades. Most of the Japanese Yen crosses fell to fresh lows in early European trading but they managed to recover all of those losses and then some throughout late European and US trading sessions. Japanese economic data was mixed with machine orders and CGPI beating expectations but the trade numbers fell short of expectations. The recent Yen strength is expected to take a big toll on exports. Last year, Japanese automaker Toyota unseated Ford as the world’s number 2 automaker by sales. If the Yen remains strong, we would not be surprise to see Ford steal the title back from Toyota in 2008.

 

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Bernanke Says Fiscal Stimulus `Could Be Helpful' (Update1)

Jan. 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said a ``temporary'' fiscal stimulus would help the central bank to buttress economic growth, while warning against worsening the longer-term outlook for budget deficits.

``Fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone,'' Bernanke said in testimony to the House Budget Committee. He repeated remarks from last week that the Fed is ready to take ``substantive additional action'' to insure against risks of a recession.

Bernanke's acknowledgment that the economy is weak enough to need a fiscal stimulus may reinforce forecasts for the Fed to lower interest rates at least half a point this month. It may also give impetus to the Bush administration and Congress to reach an agreement more quickly, analysts said.

The Fed chief said that a fiscal package could also ``prove quite counterproductive'' if the stimulus arrived at the ``wrong time or compromised fiscal discipline in the longer term.''

Bernanke reiterated that the outlook for growth in 2008 ``has worsened'' and ``the downside risks to growth have become more pronounced.'' In a question and answer period initiated by Budget Committee Chairman Rep. John Spratt, a South Carolina Democrat, Bernanke said the Fed is ``not forecasting a recession'' for this year.

Central bankers and administration officials are trying to prevent the economy from sinking into the first recession since 2001. Retail sales fell last month, unemployment rose, and housing markets are mired in the worst slump in 16 years.

Bernanke noted that banks are trying to protect asset quality and funding, and tightening credit conditions for the rest of the economy as a result.

Bank Lending

``Banks have also evidently become more restrictive in their lending to firms and households,'' he said. ``More expensive and less-available credit seems likely to impose a measure of restraint on economic growth.''

Homebuilders broke ground on the fewest homes since 1991 last month, the Commerce Department reported today. Building permits, a sign of future construction, declined by the most in 12 years, suggesting the housing slump will deepen.

Residential construction subtracted about 1 percent from growth in the third quarter, and ``likely curtailed growth even more in the fourth quarter,'' Bernanke said. Sluggish housing markets ``may continue to be a drag on growth for a good part of this year.''

Food, Energy Costs

Bernanke said that inflation, both including and excluding food and energy costs, ``should moderate this year and next, so long as the public's confidence in the Federal Reserve's commitment to price stability is unshaken.'' He cited inflation expectations that appear ``well anchored'' and futures suggesting food and energy price increases will slow.

Bernanke in past congressional appearances has typically avoided recommending any particular tax measure. His predecessor, Alan Greenspan, involved himself in shaping tax policy, recommending cuts over spending increases in 2001, a strategy which his colleagues disliked out of concern it would compromise the central bank's independence.

The Fed chairman's speech ``is an endorsement of temporary measures, if enacted quickly, but he's covering himself to ensure he is not blamed for anything in a few years, the way Greenspan is now blamed for endorsing the Bush tax cuts,'' said Ian Morris, chief U.S. economist at HSBC Securities USA Inc.

Timing Critical

Aside from quick implementation, a stimulus package should also be ``structured so that its effects on aggregate spending are felt as much as possible in the next 12 months,'' Bernanke said today. If stimulus comes at a time when growth is improving, it could be ``destabilizing,'' he said.

U.S. Treasury and White House officials are considering tax proposals that would provide consumers with more cash and give businesses an incentive to invest more in their capital stock, according to analysts speaking with administration officials.

Economists at JPMorgan Chase & Co. estimate that the economy grew at 1 percent in the final quarter of last year, slowing from a 4.9 percent pace the previous three months. Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group Inc. and Nomura Securities International Inc. are all predicting a recession in 2008.

New Strategy

Bernanke and Governor Frederic Mishkin signaled a new strategy last week, when they said in speeches that they favor greater ``insurance'' against the prospect of an economic downturn. That's a break from basing policy on central bank forecasts, which anticipate a continued expansion.

The Jan. 10 remarks by Bernanke, 54, and Mishkin the next day led traders to increase bets the central bank will cut its main interest rate to 3.75 percent from 4.25 percent currently at the conclusion of Federal Open Market Committee's two-day meeting on Jan. 30.

The Fed has reduced the benchmark rate by 1 percentage point since September. In December, Fed officials said in their statement that the outlook for inflation and growth was uncertain, a view that disappointed investors and caused a 2.5 percent decline in the Standard & Poor's 500 stock index.

Policy makers' shift may have been driven by the Labor Department's Jan. 4 report showing the jobless rate jumped to 5 percent in December, economists said. The figures also showed the first decline in private-sector employment since 2003. Bernanke called the jobs data ``disappointing.''

Bernanke and other policy makers continue to cite concerns about inflation pressures. The consumer price index, minus food and energy, rose at a 2.4 percent rate for the year ending December, the fastest pace since March, the Bureau of Labor Statistics said Wednesday.

To contact the reporter on this story: Craig Torres in Washington at [email protected] , Scott Lanman in Washington at [email protected]
Last Updated: January 17, 2008 10:47 EST

 

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U.S. Stocks Drop on Merrill Loss, Decline in Philly Fed Index

By Eric Martin

Jan. 17 (Bloomberg) -- U.S. stocks fell for a third day after Merrill Lynch & Co. posted a loss that was more than twice analysts' estimates and a Federal Reserve report said manufacturing in the Philadelphia region dropped to a six-year low.

Merrill, the largest brokerage, slumped the most in five weeks in New York Stock Exchange trading after writing down $11.5 billion in subprime mortgages and bonds. Goldman Sachs Group Inc., Morgan Stanley and Bear Stearns Cos. also declined following Merrill's earnings report.

The Standard & Poor's 500 Index lost 17.23, or 1.3 percent, to 1,355.97 as of 10:40 a.m. in New York. The Dow Jones Industrial Average decreased 113.07, or 0.9 percent, to 12,353.09. The Nasdaq Composite Index slid 15.50, or 0.7 percent, to 2,379.09. About four stocks fell for every one that declined on the New York Stock Exchange.

``Right now, this market is the Devil's arcade,'' said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages about $6 billion in San Antonio. ``We're looking at a possible recession with housing being the drag.''

Manufacturing in the Philadelphia region contracted more than forecast in January, adding to evidence factories are cutting production as the economy slows. Builders broke ground on the fewest houses since 1991 in December, making last year's decline in homebuilding the worst in almost three decades.

Merrill fell $3.67 to $51.42. Goldman lost $5.30 to $192.20. Bear decreased $2.26 to $76.79

Merrill

Merrill's fourth-quarter net loss of $9.83 billion, or $12.01 a share, compared with a $4.82-a-share deficit forecast by analysts in a Bloomberg survey. The decline resulted in Merrill's first full-year loss since 1989.

Financial companies in the S&P 500 have lost 9.6 percent as a group this year after tumbling 21 percent last year.

The Philadelphia Federal Reserve Bank's general economic index declined to minus 20.9, the lowest reading since October 2001, from minus 1.6 in December, the bank said today. Negative readings signal contraction. The index averaged 5.1 in 2007.

Fed Chairman Ben Bernanke said a ``temporary'' fiscal stimulus would help the central bank to buttress economic growth, while warning against worsening the longer-term outlook for budget deficits.

``Fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone,'' Bernanke said in testimony to the House Budget Committee. He repeated remarks from last week that the Fed is ready to take ``substantive additional action'' to insure against risks of a recession.

Harley-Davidson Inc., the biggest U.S. motorcycle maker, dropped $2.33 to $37.30 after it was downgraded to ``sell'' from ``hold'' at Citigroup Inc.

McAfee Inc., the second-largest maker of security software, slumped $1.35 to $30.80 after it was downgraded to ``neutral'' from ``buy'' at UBS.

To contact the reporter on this story: Eric Martin in New York at [email protected] .
Last Updated: January 17, 2008 10:41 EST

 

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U.S. Housing Starts Drop to Lowest Level Since 1991 (Update2)

Jan. 17 (Bloomberg) -- Builders in the U.S. broke ground in December on fewer houses than forecast, making last year's decline in homebuilding the worst in almost three decades.

The 14 percent decrease to an annual rate of 1.006 million, the lowest since 1991, followed a 1.173 million pace the prior month, the Commerce Department said today in Washington. For all of 2007, starts were down 25 percent, the biggest decline since 1980, to 1.354 million.

Building permits, a sign of future construction, declined by the most in 12 years, suggesting the housing slump will deepen as it enters a third year. Rising foreclosures will throw even more houses onto the market, hurting property values and threatening to push the economy into recession, economists said.

``Housing is getting punished by credit-market problems just as much as the economy is,'' said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina, who had forecast a decline to a 1.07 million pace. ``We expect this pressure to continue into 2008.''

Initial claims for unemployment insurance unexpectedly dropped to a three-month low, the Labor Department said separately today. Jobless claims declined by 21,000 to 301,000 in the week ended Jan. 12.

Economists' Forecasts

Housing starts were projected to fall to a 1.145 million pace from a previously reported 1.187 million rate in November, according to the median forecast of 74 economists polled by Bloomberg News. Estimates ranged from 1.05 million to 1.2 million.

Permits fell 8.1 percent to a 1.068 million annual rate, bringing 2007's decline to 25 percent, the biggest since 1974. Permits were forecast to drop to a 1.135 million annual pace, according to the survey median, after 1.162 million. Projections ranged from 1.05 million to 1.17 million.

Construction of single-family homes decreased 2.9 percent to a 794,000 rate, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, plunged 40 percent to an annual rate of 212,000 from the prior month.

The decrease in starts was led by a 31 percent slump in the Midwest and a 26 percent decline in the Northeast.

Federal Reserve policy makers, including Chairman Ben S. Bernanke, have signaled they may take more aggressive action in response to the increasing risk of slower growth. Central bankers are likely to cut interest rates by half a percentage point when they meet this month, according to futures trading.

Bernanke to Speak

Bernanke will testify on the economic outlook before the House Budget Committee at 10:00 a.m. today.

``The demand for housing seems to have weakened further, in part reflecting ongoing problems in mortgage markets,'' Bernanke said in a speech in Washington on Jan. 10. ``We also see considerable evidence that banks have become more restrictive in their lending to firms and households.''

New home sales will probably fall another 15 percent this year after tumbling an estimated 26 percent in 2007, according to a forecast from the Mortgage Bankers Association, the industry's largest trade group. Sales of existing homes will fall 13 percent this year, the group said.

``Conditions continue to be challenging in our markets and are expected to remain so throughout 2008,'' Robert Schottenstein, chief executive officer of M/I Homes Inc., a homebuilder in the Midwest, Florida and Mid-Atlantic states, said in a statement on Jan. 10. The Columbus, Ohio-based company said that sales fell in the fourth quarter.

To contact the reporter on this story: Shobhana Chandra in Washington [email protected]
Last Updated: January 17, 2008 08:52 EST

 

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Bernanke says inflation 'has to be part of the equation' even in downturn

Thu, Jan 17 2008, 16:12 GMT
http://www.afxnews.com

WASHINGTON (Thomson Financial) - Federal Reserve Chairman Ben Bernanke told Congress today that even in time of economic slowdown, "inflation has to be part of the equation" in determining Fed policy.

He said that "people have increased their inflation expectations for the very near term" and that is understandable, given what's been happening to energy and food prices.

However, the Fed also "takes some comfort" from the fact that "generally speaking, both firms and households have kept unchanged their expectations of what inflation will be over the longer term," the next five years or so.

In his prepared testimony for the House Budget Committee, Bernanke conceded the Fed is concerned about the rise in core inflation and that "part of this rise may reflect pass-through of energy costs to the prices of core consumer goods and services, as well as the effects of the depreciation of the dollar on import prices."

But, the Fed chairman said, as long as the public's confidence in the Fed's commitment to fighting inflation is "unshaken," both headline and core inflation "should moderate this year and next."

If, however, inflation expectations become "unmoored," the Fed's task will become much more difficult.

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dem/wash/cmr

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The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.

 

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Treasurys rally; Philly Fed plunges

Thu, Jan 17 2008, 16:14 GMT
http://www.afxnews.com

NEW YORK (AP) - Treasury prices soared Thursday after a Philadelphia regional manufacturing survey unexpectedly showed a deep and worrisome contraction in factory activity this month.

The Philadelphia Federal Reserve's manufacturing index plunged a full 20.9 percent in January, after dropping a much smaller 1.6 percent last month. A median of economists polled by Thomson/IFR had forecast a drop this month of just 1.3. None of the analysts expected a larger fall than 7 precent.

"This data point screams recession," said T.J. Marta, fixed income analyst at RBC Capital Markets. "Although data has been grinding lower, but this is the first true recessionary indication."

Although the weakness in regional and national manufacturing is well known, the news startled investors and distracted them from strong hints of new rate cuts and upbeat remarks about a possible economic stimulus package from Federal Reserve Chairman Ben Bernanke.

"Bernanke's speech is mainly a reiteration of earlier ones," said RBC Capital Markets' Marta. "There is not much news here."

The benchmark 10-year Treasury note shot up 15/32 to 104 23/32 with a yield of 3.67 percent, down from 3.74 percent late Wednesday. Prices and yields move in opposite directions.

The 30-year long bond gained 21/32 to 111 24/32 with a yield of 4.29 percent, down from 4.35 percent late Wednesday.

The 2-year note rose 4/32 to 101 17/32 with a yield of 2.45 percent, down from 2.51 percent the day before.

Bernanke's comments seemed to have a greater effect on stock trading than on Treasurys. During a Capitol Hill visit, Bernanke threw his support behind a possible Federal package to stimulate the faltering economy. He said any plan should be efficient and timely. and he reiterated concerns about the economy, adding that he is now worried businesss spending will slow.

Bernanke also said the risks of an economic downturn are more pronounced, and that the housing sector will be a drag on the economy for much of this year.

Other data made clear that the housing sector continues to unravel. The Commerce Department said housing starts plunged 14 percent to 1.01 million in December, marking the weakest pace of home building in more than 16 years. In addition, permits to build new homes dropped 8 percent last month to 1.07 million, the lowest level since 1993.

Thomson/IFR had forecast smaller declines for both housing starts and building permits. Still, some economists pointed out that the weakness may prove helpful in the long run, as smaller inventories of homes will take some pressure off the housing sector.

The day's sole piece of positive economic news came from the Labor Department, which announced a startling 21,000 decline in initial jobless claims to 301,000 in the lastest week. Claims had been expected to rise by 8,000 to 330,000, according to Thomson/IFR.

Very weak jobs generation last month has stoked concerns about a sharp labor market slowdown, but the latest figures suggested those fears may be overblown. Still, the weekly tallies are volatile.

Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

 

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Foreign investment in Slovakia doubles in 2007

Thu, Jan 17 2008, 16:16 GMT
http://www.afxnews.com

BRATISLAVA (Thomson Financial) - Foreign investment in Slovakia doubled in 2007 to 1.28 bln eur, Sario, the investment promotion agency, said.

"This is double the investments compared with 2006," Sario director Peter Hajas said at a press conference, adding that Slovakia's high economic growth was also a factor in the rise.

Sario closed 64 deals with companies in 2007. The highest number of projects, 16, were realised in the underdeveloped, eastern Kosice region.

Most projects were in the engineering, electronics and car sectors and were expected to create between 14,738 and 16,852 jobs.

In 2006, Sario completed 65 projects worth 607 mln eur.

Sario is working on 146 new projects this year, worth around 4 bln eur. Most of the investors come from Germany, the United States, Britain, Belgium, South Korea, Austria and Italy.

Slovakia reported economic growth of 9.4 pct in the third quarter of 2007.

[email protected]

afp/cmr

COPYRIGHT

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The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.

 

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Bernanke says permanent tax cuts might help, but quick stimulus more effective

Thu, Jan 17 2008, 16:22 GMT
http://www.afxnews.com

WASHINGTON (Thomson Financial) - Federal Reserve Chairman Ben Bernanke said today that making permanent the tax cuts that President George Bush pressed for earlier in his presidency could provide some help in the short term, but said Congress should focus on a faster, near-term tax break that would more efficiently stimulate the US economy.

"It's possible that making the tax cut perm might have some near term effect," he said in response to a question at today's House Budget Committee hearing today. "For example, making dividend relief permanent could affect today's stock market."

Nonetheless, he said extending the tax cuts is more of a longer-term issue, along with other issues such as entitlement reform, and that Congress should focus on other changes that can be made to more quickly stimulate the economy.

"Our discussion today is about short-term stimulus," he said. "The evidence suggests that measures that involve putting money into the hands of households and firms that will spend it in the near term will be more effective."

Bernanke also said a stimulus package of about 100 bln usd would be "significant," and said a package of this magnitude would "not be window dressing."

He added later in the hearing that it would be "counterproductive" to include a tax increase in a stimulus package.

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pik/wash/ajb

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Odds of further rate cut increases after Philly Fed, erasing earlier decline

Thu, Jan 17 2008, 16:22 GMT
http://www.afxnews.com

NEW YORK (Thomson Financial) - The odds of further interest rate cuts increased Thursday, reversing earlier declines, after the release of data showing that manufacturing activity in the Philadelphia region was much worse than expected.

February fed funds futures tacked on 0.01 to 96.36, which implies an 81% chance that the Federal Reserve will lower its target for overnight rates by 75 basis points to 3.5% after its next policy setting meeting on Jan. 30. Late Wednesday, the odds were at 80%.

The Philly Fed index dropped to -20.9 in January, while the median estimate of economists surveyed by IFR Markets had been expecting an improvement to -1.3 from last month's -1.6.

Earlier Thursday, the odds of a 75bp rate cut fell to as low as 74% after the Labor Department said weekly jobless claims fell 21,000 to 301,000, the lowest level seen in four months. Economists had been expecting a rise to 335,000.

Tomi Kilgore

tk1

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Metals - Copper holds onto gains as Fed chairman Bernanke begins testimony

Thu, Jan 17 2008, 16:23 GMT
http://www.afxnews.com

LONDON (Thomson Financial) - Copper held onto earlier gains as Fed chairman Ben Bernanke began his half-yearly testimony to the House Budgetary Committee on the current outlook for the US economy.

Players, already pricing in a 50 basis point rate cut at the end of this month, were encouraged by statements the chairman made about a stimulus package for the US economy.

Offsetting this, however, were more negative comments on the outlook for the US economy, which re-ignited demand worries and sent the rest of the metals complex down on the day.

Fears the US is set to slip into recession have been weighing heavily on metals all week, leading most of them to reverse gains made earlier this year on increased fund buying and index reweighting.

All the same however, analysts remain sharply divided as to the extent to which US economic weakness will weigh further on metals, which fell sharply towards the end of last year on macro economic concerns.

JP Morgan analyst Michael Jansen said while he expects a relatively weak first quarter in metals, he thinks the complex has largely priced in a weak macro environment.

Regarding copper, he said further sharp falls in LME inventories are underpinning the metal at present, while bargain hunting and trade buying is also helping prices stay in positive territory.

At 3.58 pm, LME copper for 3 month delivery was up at 7,065 usd a tonne against 7,000 usd at the close yesterday, when the metal lost 120 usd on the day.

"Recession fears are still at the forefront of everyone's trading strategies," said analysts at RBC Capital Markets. They added, however, that declining copper stocks are currently preventing heavy selling.

The LME said in a daily report today copper stocks held in its warehouses fell by a large 5,500 tonnes to total 185,550 tonnes. Stocks have now fallen for eight days straight.

Analysts at Fairfax said the decline in LME copper stocks has come about as a result of increase in physical buying from China, the world's largest copper consumer.

However, markets are still nervous as the extent to which China will be able to pick up the slack should US copper consumption dry up in the face of a recession.

Data out earlier painted a bleak picture of the US housing market, a key driver of copper demand.

Housing starts dropped by a faster than expected 14.2 pct in December to hit their lowest level in more than 16 years, according to data released by the Commerce Department.

The Department also said building permits fell by a more than expected 8.1 pct, and that declines in housing starts and permits for the year as a whole were the sharpest seen in more than 25 years.

"Given the weak outlook for the US economy it is easy to be bearish for base metals and over the long run we think a downturn in the US will drag down the global economy enough to see metal prices fall significantly later in 2008.

"However, near term we think there is room for some rebounds as China steps up imports and reduces exports across the metals and as consumers switch from destocking mode to hand to mouth buying," said BaseMetals.com analyst William Adams.

Elsewhere, lead was down at 2,540 usd a tonne against 2,609 usd, with analysts saying it might struggle near term as supplies from Australia, shut in for nearly a year now, are expected to come back on stream shortly.

The Australian authorities have reportedly given conditional approval for Ivernia's Magellan mine to ship lead concentrates via the alternative port of Freemantle.

The news "may prove a hurdle for lead prices, but given this has been expected for a number of months now this may well already be in the price", said BaseMetals.com's Adams.

Nickel fell to 27,650 usd against 27,900 usd, however analysts at Fairfax IS remained cautiously upbeat on the outlook for prices amid hopes demand from the stainless steel sector will pick up shortly.

"Reports indicate that Chinese firms are holding off purchases of nickel hoping for weaker prices, although this could be a dangerous game with significant increases expected this year in terms of demand from new stainless steel capacity and production," Fairfax IS analyst Marc Elliot.

In other metals, tin was up at 16,350 usd a tonne against 16,300 usd, aluminium was down slightly at 2,446 usd against 2,469 usd while zinc edged up to 2,285 usd against 2,280 usd.

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ma/lam

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