The Overnight Report (Friday): Fed On Hold Soon?

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By Rudi Filapek-Vandyck

Wall Street had another positive session overnight and investors elsewhere better take note of the fact that underneath the past two positive sessions an important shift is occurring in market expectations. It is this shift which can be held responsible for yet another positive week for global share markets, but also for a US dollar comeback. The latter movement requires every investor’s attention.

Super Cycle or Ordinary Cycle; it doesn’t matter what your view is on what has been pushing up prices of commodities, hard and soft. Fact of the matter is that US dollar weakness has played an important role in this process. How important exactly is still a matter of public debate. The current shift towards less aggressive Fed interest rate cuts is triggering a (temporary?) bounce for the greenback. This will take away one of the easiest and most straightforward reasons to buy commodities (and stocks of commodity producers). The result will be a cap on further gains, in a best case scenario, or a fierce headwind, under a less positive scenario.

At the moment it would appear that crude oil is able to withstand any US dollar weakness, while base metals are suffering from an automatic cap on gains. Precious metals however seem poised for some serious retreats. Experts are seeing gold back at US$850/oz -at least- while others are warning silver might see some serious damage in the weeks ahead.

It is this same shift that is at present blowing a positive wind throughout US share markets with US bond traders now anticipating one more cut on Wednesday -by 25 basis points- and subsequently no more cuts for a while. Maybe, some experts have started to speculate, the Fed won’t have to cut anymore until next year. Or, even better, maybe there won’t be any more rate cuts at all!

The irony is, of course, that this shift is occurring against a background of ongoing weak to very weak economic data. And some economists maintain that current market optimism is more than likely to be proven wrong down the track. But hey, at this point in time it’s what is pushing up share prices and that is certainly keeping many experts, stockbrokers and market commentators very happy.

Remarkable, we think, is also the fact that some chartists are starting to revise their market views into a more positive outlook. On Thursday we spotted the first chartist who believes the S&P/ASX200 index is likely to go through the 6000 level again in the sessions ahead.

So what would it take to make the current revival a sustainable one?

The answer is not that difficult: it would require debt and credit markets to normalise and for economic data in the US to show the US economy is not sinking deeper, and might even be improving already.

As far as the first requirement is concerned, it is not a good sign that ANZ Bank ((ANZ)) quietly increased its commercial interest rates one day after releasing its interim result and that National Australia Bank ((NAB)) followed one day later with a similar move. The bulls have been calling the end of all financial troubles several times since July last year, and every time that call proved to be too quickly, too early. Ultimately they will make the correct call, of course, but what are the chances that moment arrived this week?

Secondly, were economic data in the US to improve from here on this would automatically imply the recession of 2008 has been a very shallow and very short one. (Over to you whether that is a justified view or not).

As far as the “news” on Friday (Saturday Sydney time) is concerned, Microsoft’s quarterly report  disappointed, the University of Michigan’s index of consumer confidence fell to its lowest level in 26 years (having now fallen six months in a row) and oil surged nearly US$2.50 to US$118.50 per barrel. All this was offset by a research report by Morgan Stanley suggesting mortgage provider Fanny Mae might beat expectations next year. This and a good result from American Express triggered serious buying in financial stocks.

Base metals had a poor session in London but managed to recover a little ground in their US session later as the US dollar paused in its comeback. Share prices of commodity producers benefited from the overall positive momentum, as did gold stocks (which is all probably an indication of the indiscriminate buying that is occurring at the moment).

We cannot help but noticing trading guru Dennis Gartman is feeling very confident he made the correct call last month by moving to neutral on US shares, ready to turn 100% bullish again, and by exiting the gold market completely last week.

The S&P 500 rose 9.02 points, or 0.7%, to 1,397.84 on Friday, marking an advance of 0.5% on the week. The Dow Jones Industrial Average added 42.91, or 0.3%, to 12,891.86 on Friday. The Nasdaq Composite Index retreated 5.99 points, 0.3%, to 2,422.93. Almost two stocks rose for each that fell on the New York Stock Exchange. US shares have now posted two positive weeks in a row.

The SPI futures are indicating the Australian market can look forward to at least a 90 points gain when trading resumes on Monday.

Greg Peel will be back on Monday.

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