The Overnight Report: Back To Business

This story features WESFARMERS LIMITED, and other companies. For more info SHARE ANALYSIS: WES

By Greg Peel

The Dow closed up 61 points or 0.5% while the S&P rose 0.6% to 1336, pushing through the 100% rally mark, and the Nasdaq added 0.8%.

Last night's geopolitical news was that of Iran's intentions to sail two warships through the Suez Canal and into the Mediterranean to visit close ally Syria. The reason provided was training exercises for new cadets who will be charged with the task of protecting oil shipments from Somali pirates. Somalia is at the entrance to the Red Sea (the other end).

Iran has not sailed ships through the Suez since the fall of the Shah in 1979. Egypt has no reason to forbid the passage given it is not a time of war, but Israel is incensed. The Syrian visit will also put the ships near Lebanon and Iranian ally Hezbollah. Funny that the first friendly visit in 30 years should coincide with the current protest movement in the region, and in Iran.

Understandably, the oil price jumped on the news last night. Brent closed up US$2.24 to US$103.27/bbl.

Higher energy prices were blamed for a jump in the US headline producer price index of 0.8% in January. The Fed ignores food and energy prices, but the core PPI jumped 0.5% when economists expected only a 0.2% rise. PPI trends can translate to the CPI but it all depends on how retailers deal with their margins. The January CPI number is out tonight.

Industrial production unexpectedly fell 0.1% in January versus expectations of a 0.5% increase, but the news was partially offset by a positive revision for the number in December. Capacity utilisation dipped slightly. There is a snow effect here. Yet the snow didn't seem to impact on housing starts which shocked Wall Street with a 14.6% gain in January to 596,000. Economists had been expecting a fall to 520,000, but then it was all about the more lumpy and volatile apartment block component. Starts on new family homes actually fell.

Having shown signs of profit-taking on Tuesday, Wall Street was off to a flyer last night. Economic data aside, strength was provided by Tuesday's after-market profit report from computer giant Dell which blew the Street away and saw Dell shares rise 13% in last night's session. A doubling of quarterly income year-on-year was due to a resurgence in corporate demand while consumer demand remained muted.

The early rally did not last long and by midday it looked like the profit-takers might win again, but a second wave of buying rolled in to right the ship. Late in the session, the Fed released the minutes of its January monetary policy meeting.

There was little change in sentiment in the minutes as the FOMC acknowledged that while the US economy was performing a little better than hoped, the disappointment remained that jobs growth remained slower than hoped. Interestingly there were a couple of members who suggested that while the QE2 program was okay for now, it should be reconsidered if the pace of growth continues to rise. There are two new FOMC members this year under the committee's rotation rules.

It is unlikely Bernanke will bow to such pressure nevertheless. While the Fed's GDP growth forecasts were slightly increased, and unemployment level forecasts slightly decreased, inflation forecasts were also slightly decreased. Never mind that China has registered 4.9% CPI growth and the UK has registered 4.0% just this week, and that the US PPI number was strong, the Fed does not see core inflation above its top-of-target 2% before 2014. This suggests that other centres will move on rate rises long before the Fed, further weakening the US dollar. The swing factor is Europe, where the euro is still fragile given ongoing debt issues. And last night the Bank of England played down inflation fears suggesting a rate rise was not a foregone conclusion.

Gold thus doesn't know what to do and didn't move on the Iranian news either, remaining steady last night at US$1374.80/oz. The US dollar index nevertheless fell 0.5% to 78.23 which pushed the Aussie back over the line again to US$1.0038.

Base metals were also steady with the exception of copper, which fell 1%. The US$10,000/t is proving a point of reflection for copper traders. While analysts across the globe are forecasting higher copper prices ahead based on a deficit of global supply, others are arguing that tighter monetary policy in China is slowing demand. The suggestion is that the Chinese will simply not pay up at such high levels and thus copper may yet see a pullback.

The SPI Overnight was up 11 points or 0.2%.

It's a big day for earnings reports in Australia today, with Wesfarmers ((WES)), Qantas ((QAN)) and AMP ((AMP)) among the highlights.

Rudi will be appearing on Lunch Money today on the Sky Business channel at noon. 

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

Click to view our Glossary of Financial Terms