The Overnight Report: Oil Dips, Dow Runs, China Rocks

This story features WESTPAC BANKING CORPORATION. For more info SHARE ANALYSIS: WBC

By Greg Peel

The Dow closed up 130 points or 1% last night, while the S&P rose 1.1% and the Nasdaq 1.8%.

It appeared to be a return to the optimism Wall Street wants to have, and it’s a bit unclear as to who was leading who. After a down-week last week it was a case of once again looking for a reason to buy. A leading factor in the positive sentiment was a US$1.73 dip in the price of oil to US$124.23/bbl, crude having traded over US$126 early in the session.

The oil price dip – apart from being a case of if you run up US$10 in a week a bit of a pullback has to be on the cards – was attributed to a rise in the US dollar. The dollar rose on an index basis but was still lower against the pound and the euro. The spark was a Wall Street Journal report which suggested the Bush Administration was driving the “verbal” campaign across the globe to imply a floor had been placed under the currency. The Administration is looking for the US economy to pick up growth (this is a lonely position) while Europe begins to slow. That would affect a higher dollar against the euro.

This all harks back to the G7 finance meeting last month in which the finance ministers hinted that a rise of the euro above US$1.60 would bring intervention into the frame. It is in the interests of both the US and Europe to see the dollar stabilise.

Also affecting oil was some uncertainty surrounding the Chinese earthquake. The death toll in the Sichuan province is climbing towards 9000, and it is unclear what damage has occurred to power stations in the area. The halt to economic activity the destruction will bring could be translated into a fall in demand for resources, including oil.

So falling oil provided positive impetus for Wall Street. However, US dollar traders suggested they were buying on strength in stocks. As the higher dollar set oil off, it’s a bit hard to tell what the underlying root cause is here.

There was little doubt of the cause of the big Nasdaq rally. This was fuelled by confirmation that Hewlett Packard was in negotiation to take over Electronic Data Systems. While the former’s shares fell 5%, the latter’s rose 28%. Research In Motion announced its new Blackberry offering, called Bold, which set off a 7% rally in its shares.

The financial sector was back to positive after some weakness last week. Troubled bond insurer MBIA announced a first quarter loss of US$2.4bn, which included US$3.6bn of unrealised losses from insuring CDOs. The company has channelled US$900m into its main bond insurance unit as it begins to pay out on subprime. The Street expected a per share loss of US$1.45, but got US$3.01. However, the CEO said the company’s capital was sound (a familiar offering) so the shares rallied 5%, of course.

Financials were also heartened the UK’s HSBC Bank’s first quarter actual profit in the face of US$3.2bn in US subprime CDO write-downs.

What was largely ignored by the market was a suggestion from general insurer AIG’s CEO that the company was “in crisis”. Having fallen heavily last week following a big first quarter loss, AIG shares fell another 4%. It just goes to show what a difference a CEO’s words can make to sentiment, even if the profit results are all bad.

This week in the US will be all about retailers, as the earnings season begins to wind down. April retail sales are released tonight and the big retailers all release their first quarter earnings this week. Once earnings season is completed it will be back to a focus on the economic data. The CEO of JP Morgan commented at a conference last night that he thought while the credit crisis was probably 75% of the way through, a deep US recession had “just begun”.

Gold fell US$2.10 to US$881.90/oz on the mixed greenback. The reason the US dollar rose against the yen but failed against the pound and euro was due to the pound’s rally on the UK’s April PPI release. A rise of 1.4% to an annual rise of 7.5% was the biggest move since the data began being collected in 1986. As the yen fell, the Aussie was also stronger by US0.4c to US$0.9475.

Having been sold off heavily late last week, base metals staged a bit of a comeback late in London. The stronger US dollar helped, but there was also uncertainty surrounding the Sichuan earthquake. The region is home to zinc and lead mines and aluminium production facilities. Citigroup analysts also raised their aluminium price forecasts, helping aluminium up 2%. The field finished mildly higher.

The SPI Overnight rose 50 points – close to matching the Dow rally on percentage. This correlation was absent last week as reactions in the SPIO were muted while the physical index has done its own thing, which is pretty much rally. Financials have been the focus, with bank results taken to be largely positive. Now we have the Westpac ((WBC))/ St George ((SGB)) “merger” negotiations (one is clearly the superior) which will send the Dragon’s shares for a run today. Judging by initial public outcry, a government sanctioned merger will be no gimme. This could be a drawn out process.

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