The Overnight Report: Stalemate

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By Greg Peel

The Dow closed down 30 points or 0.3% while the S&P lost 0.4% to 1101 and the Nasdaq fell 0.6%.

I have suggested previously that Wall Street would spend the earnings season bouncing around with each new earnings report, and economic data release, while the smart money will simply be assessing the trend. The reality is that this is a “traders' market” at present, meaning the bulk of activity is being driven by players who have little desire to hold positions for very long. We know that those looking to invest for the longer term have thinned in number since the GFC, evidenced by high levels of cash and fixed interest holdings.

Last night the Dow burst out of the blocks to open up 87 points, sending the S&P 500 to 1115 once more, before falling to be down 110 points at midday, and finally rallying to close down only 30. One might have expected only a mild movement such as down 30 ahead of tonight's GDP release, but it was a wild ride to get there.

What is currently worrying a lot of old-hand Wall Street traders is the issue of “correlation”. I will expand on this problem further in a story today.

At the micro level, the initial burst on the open can be largely attributed to a good result from the market's biggest company – Exxon (Dow). But as the morning progressed weak results from consumer staple giants Colgate-Palmolive and Kellog were enough to turn sentiment around.

Then in the afternoon, the president of the St Louis Fed released a research paper in which he suggested “The US is closer to a Japanese-style outcome today than in anytime in recent history”. James Bullard was referring to Japan's “lost decade” of the nineties (and little better since) which featured crippling deflation and moribund stock and property markets, all as a result, retrospective opinion suggests, of naïve monetary options adopted after the Japanese crash of 1990.

Bullard is a member of the camp within the FOMC which is pushing for more quantitative easing to avoid such a fate. But there is another camp – those who want to see interest rates raised in order to prevent another bubble forming for the very same reasons as last time. Chairman Bernanke – famously a student of the Great Depression and 1990s Japan – is stuck in the middle suggesting only, to date, that the Fed stands ready to re-implement QE if deemed necessary.

While those were the micro drivers of last night's action on Wall Street, the macro drivers were more straightforward. Aside from the “don't know” group on the sidelines, the current players are polarised between those wanting to sell on double-dip expectations and those disbelieving a double-dip and looking to pick up supposed value. In other words, when the market goes up enough the sellers come in and when the market goes down enough the buyers come in. Because the S&P 500 has returned to its pivot point of its 200-day moving average, we are seeing intraday volatility but a lack of interday volatility.

The VIX volatility index, incidentally, has flatlined during July around the 24 level – neither here nor there.

Outside of the NYSE, markets were relatively text-book last night.

The European Commission released its monthly economic sentiment indicator which showed a surprisingly strong gain among eurozone members. Germany led the charge. This pushed the euro above US$1.31 for the first time since the EU/IMF bail-out package was first announced.

The euro's move sent the US dollar index down 0.6% to 81.62 – its lowest level in three months. The dollar fell against all of the euro, the pound and the Swiss franc, and also against the yen which implies risk appetite. Also implying risk appetite, and more distinctly so since the GFC, is the Aussie. CPI? What CPI? The Aussie jumped back to US$0.9002 last night.

Commodities all played to their natural games on the dollar's fall. Gold was up US$3.20 to US$1166.50/oz, oil was up US$1.37 to US$78.76/bbl, and London base metals were all up around 1%.

The US Treasury auctioned US$29bn of seven-year notes last night, and demand was a little down on last time. Foreign central banks picked up only 42% compared to a running average of 50%. Throw in James Bullard's comments at the short end and falling demand for long-dated Treasuries at the long end (and, perhaps, add in Niall Ferguson's opinion) and what we might be looking at is a classic deflation followed by hyperinflation outcome. But we won't go back into that now.

The SPI Overnight lost 17 points or 0.4%.

Tonight's the big one in the US – second quarter GDP. Consensus has the figure at 2.5%, and Wall Street will pivot around it.

There will also be second quarter expenditure and income data to absorb, the Chicago PMI, and the second Michigan Uni consumer confidence measure for July. Chevron (Dow) and Merck (Dow) will release earnings reports.

In Australia we have June private sector credit today, an earnings report from Energy Resources of Australia ((ERA)), various production reports from miners, and the Macquarie Group ((MQG)) AGM.

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