The Overnight Report: Suddenly, Some Good News

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

By Greg Peel

The Dow closed up 103 points or 1.0% while the S&P added 1.2% to 1092 (re-taking the 50-day moving average) and the Nasdaq rose 1.3%.

What is it with Australia, Canada and the agricultural space all of a sudden?

Last year Canada's Viterra took out Australia's ABB Grain, and on Monday rival Agrium offered a 40% premium for AWB ((AWB)). Now the Aussies have fought back, with BHP Billiton ((BHP)) last night making a US$37bn offer for fertiliser giant Potash Corp of Saskatchewan.

It's not exactly a shock, and in fact is a potential deal that has been talked about now for many moons. The big miners might be diversified, but only within the resources sector space. Potash – the material, not the company – is essentially “mined”, so its no leap of competency for a BHP to add fertiliser to its list of products and in so doing diversify into an altogether different sector which does not have to follow lock-step with mineral and energy cycles.

Indeed, BHP is already sitting on a large potash resource, yet to be exploited. But it would speed up the big miner's entry into this new market if it were to acquire some immediate expertise. Hence the offer for Potash – the company, not the material.

The timing is interesting, however. BHP has offered a 16% premium at US$130 per share but only a month ago Potash was trading at US$85 before the recent soft commodity price surge kicked in. BHP is now chasing and few believe US$130 will be the final bid, particularly given Potash immediately rejected this one. Does BHP feel it might otherwise miss the boat? Either way, M&A is hotting up again as if this were a bull market. Where will Incitec Pivot ((IPL)) go today?

Or for that matter, BHP? Most will recall that if not for the ridiculously glacial processes of the ACCC, BHP may well have taken out rival Rio Tinto ((RIO)) at the top of the market just before the GFC, thus finding itself with the same mountain of debt that nearly sent Rio out the back door. Will the Big Australian end up paying overs?

M&A activity is healthy for stock markets, and so are positive earnings reports from major retailers – now more than ever. The world's biggest retailer and a Dow component, Wal-Mart, last night announced better than expected quarterly earnings. And so too did home renovation warehouse chain Home Depot. Their revenue growth was not exactly stellar, but Wall Street liked the results all the same.

Wall Street also liked the July industrial production number, which showed a rise of 1.0% when economists had expected only 0.6%. The difference was put down to auto production, and specifically the government-owned General Motors' decision to not close down its factories for annual re-tooling this year – a move which has also distorted the unemployment figures. But take out autos, and IP still rose 0.6%.

With the IP measure comes the capacity utilisation measure, and it rose to 74.8% from 74.1% in July. One reason the Fed has been happy to keep its cash rate near zero is the excess capacity in the US economy, which is otherwise deflationary (factories sitting idle have to be brought back on line before you can even start thinking about growth).

Speaking of deflation, or otherwise, the producer price index marked its first rise in four months in July, ticking up 0.2% on increasing costs for raw materials. The core (ex food & energy) rate rose 0.3% when economists had expected 0.1%.

Housing starts are a vital indicator at present, and they rose 1.7% in July when economists had expected only 0.2%. Have we all just been wrong about the US economy? Well unfortunately the housing starts number was boosted by a jump in lumpy apartment block starts, and in fact single home starts fell 4.2%. Permits – the step before starts – fell 3.1%.

But it's a rare day at present, for an otherwise despondent Wall Street, that sees all of positive earnings, positive data, and a big M&A deal. The Dow surged in the morning session.

Ambivalence proved the winner in the end, nevertheless. In the last hour enthusiasm faded to turn a 178 rise in the Dow at lunchtime into only a 103 point rally by the bell. At less than 1bn turnover on the NYSE, it was yet another day of little volume, and that includes a five-fold jump in Potash share activity.

In the forex world, the focus last night was on the luck of the Irish. Ireland was the first eurozone member to threaten default even before the GFC proper, but it then slipped into the shadows as the Mediterranean states hogged the spotlight. Recently, however, Irish banks have clearly been struggling, and Irish sovereign debt has been blowing out in yield to once again draw attention to a European crisis which will not go away in a hurry. But last night Ireland found solid support for an auction of E1.5bn of government bonds, and the euro jumped as a result.

This sent the US dollar index down 0.3% to 82.22, which in turn had the Aussie jumping 0.7 of a cent to US$0.9052. Gold nevertheless trod water at US$1224.70/oz.

Oil made a modest gain after several weak sessions in rising US53c to US$75.77/bbl, but metals were jolted out of their slumber in London as the technical traders revved up on positive news from across the pond. Aluminium jumped over 1%, while copper, nickel, zinc and lead all made 2% gains.

The SPI Overnight rose a more tepid 17 points or 0.4% after yesterday's turnaround in the physical market.

Another little piece of news which helped Wall Street along last night came from the Fed. Individual regional Fed presidents have become quite vocal of late, exploiting their right to speak freely about FOMC policy. Last night the rarely heard president of the lesser Minneapolis Fed (not an FOMC member) spoke out to suggest the committee's recent decision to roll mortgage securities into Treasuries and thus maintain quantitative easing levels was nothing to do with a “weak” US economy at all.

Instead, said Narayana Kocherlakota, the move simply reflected the fact low interest rates are allowing mortgage holders to pay off their loans early, thus reducing the Fed's balance sheet more rapidly than had been intended. The move to roll those loans into Treasuries is simply a counter measure, not a move designed to imply emergency measures.

That sounds all well and good, but rather belies Ben Bernanke's previous statement that the global economic situation had become “unusually uncertain” and that the FOMC was considering at least three different strategies to support the US economy if they were needed – one being buying bonds again. As he is not an invitee to committee meetings, Kocherlakota is simply speculating.

Wall Street has a break from economic data tonight but today in Australia sees the release of Westpac's leading economic index, as well as a rash of earnings reports.

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