The Overnight Report: Stalled

By Greg Peel

 

The Dow fell 26 points or 0.3% while the S&P fell 0.5% to 1097 and the Nasdaq finished as good as square.

 

After two days of hundred-plus point rallies in the Dow it was likely we needed something pretty positive again to keep taking us forward. On Monday, positive readings on manufacturing sector growth in the US and Europe provided an impetus and on Tuesday it was US pending home sales. Last night we saw readings on services sector growth and the US ADP private sector jobs report.

 

The ISM non-manufacturing index measures the performance of the US services sector, which represents 80% of US output compared to manufacturing’s 20%. The index rose from 48.5 in December to 50.5 in January, which is positive because numbers under 50 imply contraction and above 50 imply expansion. But economists were hoping for 51.0, and so the stock market fell from the outset. The Dow dropped 65 points.

 

Prior to the US release, the UK showed a drop in its services index from 56.8 to 54.5 and the EU from 54.6 to 53.5, both of which were considered in the context of twenty feet of snow all month.

 

Next on Wall Street was the employment report. The ADP (Automatic Data Processing) jobs report is an unofficial private measure which measures movements in non-farm jobs for the month in the private sector only. The official government report, due on Friday, includes public sector jobs. Two years ago most commentators dismissed the ADP number as being wildly unreliable as a predictor of the official number (although this doesn’t confirm which is the more accurate). However, in the past year there seems to have been a lot more consistency (after a change in methodology).

 

ADP said the private sector lost 22,000 jobs in January. This is the 24th consecutive monthly loss, but the smallest loss to date (last March the loss was 736,000). And if you add back the public sector expectation of jobs growth in January, the prediction becomes a gain of 15,000 for Friday’s number.

 

This should be good news, being a gain, but economists have a 20,000 gain pencilled in for Friday so the response to the ADP number was mixed. The Dow rallied a bit then fell back again. Thereafter it was just a choppy session to the close.

 

Weighing on sentiment was an earnings miss from drug-maker Pfizer, along with a reiteration from President Obama that he intends to push through with healthcare and financial sector reform. Selling in health stocks and banks stymied an attempted late rally.

 

Meanwhile, across the pond, Greece has now effectively become an EU protectorate following Brussels’ acceptance of the Greek government’s budget plan. But while Greece has offered to reduce its deficit from 13% of GDP to 3% by 2012, the EU wants to see action, not just words. It has imposed tough reporting criteria and expects to see results in as early as a month’s time. And the EU is also considering suing the Greek government for previously providing falsified budget statements, but one presumes that’s not really going to help right now.

 

Then the Greek trade unions decided to call a general strike in response to impending budget cuts. That’ll be helpful too.

 

With Greece now under protection for the time being, bond traders turned their attention to domino number two - Portugal - and last night started to sell down Portuguese sovereign bonds as the new trading play. The credit spread blew out a further 20 basis points. Spain is next. Meanwhile, traders are calling Greece the Lehman Bros of Europe and declaring that if Germany does not intervene with a rescue, which it staunchly refuses to do, Greece will be to the euro-zone what Lehmans was to US investment banks.

 

All of which turns attention back to investment in US bonds, which despite America’s own massive deficit are considered a safe haven (America has all the guns, you see). The US ten-year bond yield last night pushed back up to the 3.7% mark while the US dollar index rebounded after two days of correction to 79.37.

 

If you add up the weaker US data last night along with increasing concerns in Europe and Chinese tightening measures, it’s a recipe for commodity funds to really start to lose their bottle. They must really now be wondering why they ever bought commodities in size on a pure currency play.

 

Accelerated fund selling saw base metals trashed last night, with nickel and tin down 1%, aluminium down 2%, lead and zinc down 3%, and copper down 4% to fall below US$3.00/lb for the first time since October.

 

Oil finished down US25c to US$76.26/bbl which was a pretty good result when you consider that weekly crude inventories were (as per usual) the opposite of expectation, such that a rise was noted when a fall was expected.

 

Gold gave back US$5.70 to US$1108.40/oz and silver fell 2%. The Aussie lost more ground to US$0.8833.

 

The SPI Overnight fell 27 points.

 

Look out for Australian retail sales today, and tonight both the BoE and the ECB make rate decisions. Under the circumstances, they’re hardly likely to be raised.