The Overnight Report: Banks Lead Wall Street Higher

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By Greg Peel

The Dow rose 80 points or 0.7% while the S&P added 0.7% to 1184 and the Nasdaq gained 0.5%.

On last night's rally, the Dow Jones Industrial Average is now a mere 1.5% rally away from its April peak. The more relevant S&P 500 would require 3%. By contrast, on yesterday's close the ASX 200 is still 8% away from its April peak of 5025.

It is now widely accepted on Wall Street that QE2 is priced into the market, and maybe even a little too much so. As a modicum of doubt on the size of QE2 crept into the market on Friday, traders covered US dollar shorts and sent the Aussie running quickly away from parity. The greenback was higher still when US stock markets opened last night.

But it was all down hill from there.

September industrial production in the US came in with a fall of 0.2% when a rise of 0.2% was expected. While 5.4% up over twelve months, September's result represented the first IP contraction in six months. More evidence the US economy is quietly slowing.

Hence more evidence that QE2 is needed, and thus the US dollar fell from earlier highs to be down a touch on the day at 77.00. The Aussie, which had slipped as low as US$0.9850 in yesterday's local trade, marked a 0.3 of a cent gain since Friday night to US$0.9932. The US ten-year bond yield, which had rallied for a couple of days on QE2 doubts and a very weak thirty-year bond auction, fell 8 basis points to 2.49%.

The NAHB monthly measure of housing market sentiment was also released, and it showed a 3 point gain to 16 when a flat result was expected. While this represents a tiny bit of pick-up in activity, one must remember this is a 50-neutral index.

US stock will usually rise when the US dollar falls but it was the third quarter result from Citigroup which really provided the impetus. Citi posted US7cps earnings against US6cps expectation which was up from a loss of US27cps in the third quarter '09. Citi did, however, miss on the revenue line.

This was by no means a great “beat” on paper, but Wall Street loved it and sent Citi shares up 5.5%. The Street was no doubt pleased to hear that bad debts had appeared to have peaked in the quarter, but given the banks had been sold down heavily for three sessions in a row on foreclosure moratoria and CDO fraud allegations there were likely a few shorts being covered.

On the subject of foreclosures, Bank of America announced late in the session it would lift its moratorium and recommence foreclosures next week. This gave the banks another kicker to the close ahead of BofA's result tonight. BofA is a Dow stock and financials are the biggest cap-weight sector in the S&P 500. Citi got the boot from the Dow recently but is every day the most actively traded stock on the NYSE despite being about a quarter owned by Uncle Sam.

The earnings stories continued after the bell. Computer services giant IBM (Dow) handsomely beat on earnings and snuck over on revenue, but Wall Street was not all that thrilled with the company's pipeline of contracts, and having bought the stock up heavily in recent times has sold it down 3.6% in the after-market.

Then there's everyone's darling stock of the moment – Apple. Apple is now the second biggest stock in the US behind Exxon but it's not in the Dow (yet) so its impact is mostly felt on the Nasdaq. Unlike, say, a Citi which is trying to recover from disaster, Apple never really saw too much disaster from the GFC. Yet its earnings and revenue in the third quarter were up around 70% on last year. Earnings of US$4.64ps and revenue of US$20.3bn easily beat Wall Street's numbers of US$4.08 and US$18.9bn.

So Apple should be flying in the after-market, right? Wrong – once again, Apple shares have had a very strong run lately and at the end of the day while iPhone sales comfortably beat estimates, sales of the new iPad fell short. Apple shares are down 5%.

So there was likely a bit of “sell the fact” going on in the after-market which will make it tougher for Wall Street to mount an assault on the April highs tonight.

Oil, by contrast, has been weak of late so the slide in the dollar sent it up US$1.83 to US$83.08/bbl last night. Gold ticked up US$4.50 to US$1373.40/oz while base metals had a fairly strong session in London, rising 1-2%.

The SPI Overnight gained 41 points or 0.9%.

Today in Australia we will see the minutes from the October RBA meeting and economists will be looking carefully for more clues as to whether we should expect a Cup Day rate rise. OZ Minerals ((OZL)) will release its quarterly production report.

Tonight in the US sees results from BofA and Goldman Sachs along with Dow components J&J and Coke and Google's poor cousin Yahoo. The Bank of Canada makes a rate decision tonight which may impact on the US dollar.

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