The Overnight Report: Fear Subsides

This story features NEWS CORPORATION. For more info SHARE ANALYSIS: NWS



By Greg Peel

The Dow rose another 111 points or 1.1% while the S&P gained 1.3% to 1103 and the Nasdaq added 0.9%.

This time last month, the US was shocked to learn that November pending home sales had plunged by 16.4% following several months of healthy rebound out of the GFC trough. The woes continued when December existing home sales fell 16.7%. Had the US recovery derailed?

Economists were not surprised by the data. The simple reality is that the Obama Administration had introduced a homebuyer grant, a la the Rudd government but in a different form, which had originally been intended to expire at end-November. Thus everyone who wished to exploit the grant and buy a home did so in the preceding months with expiry in mind, and it was thus no surprise at all when pending home sales fell into a hole in November. That lack of pending sales then flowed through to a lack of actual sales in December. But in the meantime, the Administration decided to extend and expand the grant.

Hence last night the US was very relieved when December pending home sales rose again by 1%, marking a10.9% increase over twelve months. It is anticipated thus that January actual home sales will see a similar bounce. The figures confirm that the hole in November was expiry-related and that in fact there are still plenty of Americans looking to buy homes, as long as the government is offering incentives.

This piece of data was sufficient to add to the relief that was felt on Monday following the positive manufacturing data. For a couple of weeks, Americans had become pretty concerned that perhaps their economy was not recovering at anything like the pace they had assumed, despite a 5.7% GDP estimate. But even 5.7% (which will probably be revised down in the next round of calculation) is nothing too spectacular compared to past initial bounces out of recession. Yet the big rally in the stock market to mid-January was suggesting better things.

And so we had a sell-off, into short term oversold territory, and now we’re retracing. The dark mood has lightened somewhat. Adding to last night’s renewed enthusiasm was a good result from America’s leading homebuilder, a broker upgrade for Alcoa, and an investment upgrade by Bank of America for the credit card sector in general, which gave Amex a solid boost.

There are nevertheless a few realities still to face. Many stocks and indices saw technical break-downs in the recent sell-off, and if support failed to hold once it will be easily broken again. We spent a lot of time in 2009 arguing about the alphabet, and as to what shape the recovery would take. The smart money always suggested that the recovery would not be swift and linear but slow and bumpy. And that’s pretty much what we’re seeing. The stock market is responding accordingly.

There was further relief stemming from Europe last night to help the restoration of risk appetite. The Greek government has come up with a budget plan to reduce its deficit from 13% of GDP to 3% by 2012, which is actually the EU limit in the first place. Brussels has suggested the plan is do-able, albeit not without risk, and is expected to formally accept the proposal tonight.

This sparked an easing of the credit risk spread currently being applied to Greek sovereign debt. Greek bonds had blown out to as much as 400 basis points above the benchmark German bond. This may seem like no big deal when one contemplates, for example, the spread between US and Australian bond yields, but the US and Australia operate on different currencies and cash rates. Germany and Greece share one currency and one cash rate, meaning the surplus economy of Germany has to assume the risk of the deficit economy of Greece as if it were some black sheep sibling.

With Germany the only economy of note in the EU operating with a surplus (even France is carrying a deficit), episodes of the past few months surrounding “Club Med” (a derogatory label being applied to the indulgent economies of Greece, Portugal and Spain) have put a severe strain on the survival of the euro as a common currency and the EU as a trading bloc.

The combination of positive US data and easing Greek concerns saw the US dollar index fall again, to 79.01. The big news across forex markets last night was the RBA’s decision not to raise (which many fools failed to anticipate), which had sparked an initial one cent drop in the Aussie. However, once it became apparent that March may yet see a rate rise the Aussie recovered back half of that drop, to US$0.88.67.

Commodities responded to economic data and a weaker greenback. Copper and zinc were a bit lacklustre but the others rose 1-2%.

Oil surged US$2.80 to US$77.23/bbl on a number of factors, including home sales, the US dollar, a refinery fire, fresh Nigerian pipeline attacks and news that the US is moving more missiles into the Persian Gulf. Oh, and weekly inventories are expected by analysts to fall when announced tonight, which means they’ll probably rise.

Gold continued its renewed popularity having passed back through the US$1100 mark, gaining another US$9.10 to US$1114.10/oz.

The SPI Overnight was up 54 points.

News Corp ((NWS)) reported in the US after the bell, posting a better than expected result on the back of improved local ad sales and some 3D movie everyone seems to be talking about. News posted second quarter net income of US10c per share compared to a loss in the same quarter last year of US$2.45ps. News shares are currently up 1.6% in the after-market.

News will also report its interim result locally today, as will West Australian News ((WAN)). Watch out also for the December trade balance.

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