Ben Bernanke galloped to the rescue on Friday by reducing the Fed’s “discount rate” by 50 basis points. This led many commentators to anticipate a cut in the more important cash rate following the US Fed’s next meeting or even sooner. The immediate effect was to create a bounce in US stock prices that should be followed in Asia today.

The experienced observers are warning that there is more bad news to come with the odds shortening on a US recession.

David Uren looks at the likely effects on the China boom and metals prices:

The fallout in metals markets has been caused by hedge funds and institutional investors quitting positions, whether because they believed a world slowdown was imminent or, in the case of hedge funds, because they needed the liquidity and there was still a ready market for metals futures.

Traditional commodity analysts and traders remain impressed by the continuing fundamental tightness of metals markets and have seen the price plunges of recent days as a buying opportunity.

The sell-off has been concentrated at the short end of the price curve, while longer term futures prices have remained firm.

Stocks for most of the base metals are at historically low levels, but it is worth recalling that few commodity booms have ever been brought back to earth simply by supplies gradually catching up with demand and restoring a balance, as has been the most popular scenario over the past few years.

Rather, such booms have ended with a bang, as global economic downturns undermined the growth upon which they were based.

Do take a look at the graph with Uren’s article in the hard copy of The Oz (and let them know it would be good to have graphs in the online edition). Metals prices are very cyclical and possibly we have entered a downturn. But one can also interpret the graph as an inevitable correction about a rising trend.

Only time will tell, and a recession in the US would certainly not be helpful.

The Economist’s lead article today is headed “Surviving the markets”:

Investors have been asking for years if the frantic innovation in finance, especially the securitisation of just about every form of debt into a tradable asset, was a way to spread risk efficiently, or whether this left the financial system prone to rare-but cataclysmic-failures. It looks as if investors are about to find out.

The venerable mag is appropriately agnostic in its conclusion:

Because this crisis taps so deeply into the newly devised structures of finance, anyone who says the worst is definitely over is either a fool or someone with a position to protect. As risk has become bewilderingly dispersed, so too has information. Nobody yet knows who will bear what losses from mortgages-because nobody can be sure what those loans are really worth.

This is about deep uncertainty rather than risk, and it is the uncertainty about what may emerge from the current turmoil that is the most worrying feature of current experience.

Go carefully, gentle reader.

Read more at Henry Thornton