The Overnight Report: Intel Beats The Street

The Dow added 29.78 overnight and closed at 10,710.55 (up 0.28%), the S&P500 gained 2.72 pts to 1148.40 and the Nasdaq closed 8.84 pts higher at 2316.74.

The Australian SPI 200 Mar 10 futures contract is up 6 points or 0.1% to 4885 (prior to the Intel news).

Interest rates are not going to go up any time soon in the US or Europe. It was this message that kept equity markets on a positive streak last night. Two days ago, I wondered whether we might be entering a new phase in the cycle, one that would see good news transform into not so good news. It turns out that, for now, we’re still in the old phase: not so good news from the economic front is actually very good news.

New York Fed President Dudley chimed in on Wednesday (US time) declaring US interest rates may remain low for at least six months and possibly two years. But what really got the market going were disappointing retail sales. Hot on the heels of disappointing US labour market data last week, yesterday saw the release of December retail sales in the US, revealing sales at US retailers unexpectedly fell 0.3% in December compared with a market forecast of a small gain.

Under “normal” circumstances this would have been taken as a very bad token. After all, retail stocks had been running hot of late, but in the present state-of-mind this quickly becomes market stimulus as investors draw the inevitable conclusion: the Fed is not going to raise as long as the labour market and retail sales remain in dire straits. Buy!

Earlier in the day, European Central Bank President Jean-Claude Trichet declared the region’s outlook as still unclear, which sparked a sell-off in the euro (no rate rises for the foreseeable future).

Market focus again turned to troubled EU member Greece, with Trichet warning high and sharply rising fiscal imbalances could trigger negative market sentiment and result in higher funding costs. (Greece wasn’t mentioned but the message was clear).

The Greek finance minister provided the first details on the Greek stability plan, which is to be sent to the European Commission tomorrow. Already economists have commented the plan appears very ambitious, as the Greek government intends to bring the deficit down from around 13% of GDP last year to just 2.8% of GDP in 2012.

Trichet signalled ECB officials will wait for more signs of economic recovery before withdrawing emergency stimulus measures further. European equities enjoyed a positive session. The DJ Euro Stoxx 50 rose 0.4% to 2990, the German DAX gained 0.4% to 5989 and the FTSE was 0.5% higher at 5498.

A well-received December production report by Anglo-Australian Rio Tinto ((RIO)) lent some additional buying support, as did the anticipation of a good Intel result. The world’s largest chip maker was scheduled to report its quarterly figures after the close of the market and investors acted like teen kids who simply cannot wait until Xmas night to find out what’s under the tree. Intel shares had been rising the whole week and yesterday’s session was no exception.

In the wake of Intel, other technology stocks including IBM and Microsoft were riding the positive wave as well.

The wire headlines emanating from Trichet’s press conference in combination with disappointing US retail sales were enough to spark (temporarily) a comeback for the US dollar. The dollar index recovered after having fallen to a 3-week low the previous day. Oddly enough, the British pound remains bid against the US dollar after BOE policy maker Sentance said the BOE has done enough to stimulate the economy and may have to increase interest rates later this year.

However, the early gains made by the USD evaporated again as the day moved on (no imminent interest rate hikes). In the aftermath of a surprising employment data release in Sydney yesterday, the Australian dollar remained bid all day. AUD/USD openes strong this morning at 0.9309. AUR/EUR equally opens strongly above 0.6400, gaining 0.5%. AUD/JPY initially rallied above 85.60, later paring back gains to open lower at 84.70. AUD/NZD opens unchanged at 1.2540 after a quiet trading session.

The bad news is good news response in equity markets did not extend to commodities. LME metals continued their surge at first, but subsequently gave all gains back as a stronger USD and signs of weaker economic recoveries did their work. LME metals closed largely unchanged compared with the previous session.

However, crude oil futures continued their losing streak, now four days in a row. Technical chartists have been flagging that as long as crude oil remains priced below US$80 per barrel its focus remains south and this should keep a lid on any upside potential for now. Apart from a negative technical picture, crude oil has had to battle some serious negative news from the fundamental side recently. Demand remains anaemic and inventories higher than market expectations.

It’s probably a fair assumption that a bouncing USD and further signals of weak economic recoveries in the two largest economic regions across the world didn’t exactly inspire too many speculators into buying more exposure. Recent market data revealed the build-up in speculative positions in anticipation of higher oil prices has been nothing short of phenomenal. Some experts say now this is likely to turn out another bearish factor.

February crude and February gasoline both fell to two-week lows. Note also that the previous tight correlation between oil prices and equities has broken down. The reason is obvious: crude oil needs a healthy economy, equities are taking guidance from the likely deferral of interest rate increases.

Spot gold gained 0.5% to US$1,143.93 an ounce.

The US bond market rallied (yields lower) on the disappointing retail sales. The US$13bn auction of 30-year bonds met solid demand. The 2-year yield fell 4bps to 0.919%, whilst the 10-year yield declined 6bps to 3.729%.

Several hot news topics from earlier this week continued to dominate market conversations overnight, like the new bank tax from the Obama administration and the Google-China controversy.

Greg Peel will be back by the end of the month.