CHINA VERSUS U.S. NEW HOME SALES

In the grand scheme of things everything has rallied. Commodity prices are higher. Equity prices are up. And economic prospects are up. Heck, even bonds are up these days. Wednesday had to be one of the quietest days we can recall as many things traded within narrow ranges. The exception was the dollar, which was greeted by news that was positive for the domestic economy while overseas news was sour, but again, a positive for the dollar.

The price of copper traded in a rather tight range. As we've pointed out several times before, the Chinese state has been a major buyer throughout the earlier part of 2009 and has effectively put a floor under the metal. News Wednesday that the 9.6% monthly jump in U.S. new home sales was the largest in four and a half years spurred buying of the metal because builders are the greatest consumers of it.

New home sales, which account for around 15% of overall residential sales rose to an annualized pace of 433,000 units in July. Meanwhile orders for goods meant to last at least two years, so called durable goods rose 4.9% for the biggest monthly gain since July 2007.

December copper prices added 0.1% to $2.8770 per pound illustrating the torment between positive economic news at home and the problem of potential bubbles blowing-up in mainland China.

Commodity-sensitive currencies didn't have such a great time of things midweek, falling sharply against the dollar. But it wouldn't be exactly true to say this was because of the bullish U.S. data. Typically the recovery has tripped the greenback as dealers ditch the safety of the dollar. Rather the dollar's rise followed well-founded reports from the Chinese agency, Xinhua News, that the state was investigating ways to reign in the activities of companies responsible for over-production.

For some time now many observers have watched the Chinese dragon recover remarkably well, coping amiably with the drop-off in external demand as domestic companies have stepped up to produce things the world didn't need. The main reason behind the success of such companies has been the wall of money thrown at them by the state-run banking system. Onlookers point to growth in the stock market and rallies for domestic property markets as direct results of the loose credit policy.

Other companies taking money and finding creative ways to use the funds are bolstering prices of raw materials. So the government has now determined that it should curb its practice of lighting the fire beneath these companies. Steel, cement and other industries will now face the gentle "guidance" of the Chinese government as it acts to prevent credit growth blowing up into an even bigger asset bubble. The dangers of doing so in the face of weakness in external demand are real.

The dollar rose against most currencies and we feel it was the reaction to China's actions rather than to that of bullish American data that created the move. Looking at the prices of nickel and tin, which both declined, it would appear that the market agrees with that line of thought.

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