The Overnight Report: Skype Me

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By Greg Peel

The Dow rose 75 points or 0.6% while the S&P gained 0.8% to 1357 and the Nasdaq added 1%.

Australia's trade balance rebounded sharply in March driven by a 40% recovery in coal exports above a flooded February result. Other minerals chimed in with a 15% jump, providing a monthly surplus of $1.74bn compared with February's small deficit of $87m. Economists were predicting only a $500m surplus, so once again interest rate hike expectations have been fuelled.

Where did those materials go? Well, Beijing's abacus can beat the ABS main frame any day, so a month ago Beijing told us China's March trade balance slipped to a slight deficit. This implies material imports exceeded the export of manufactured goods and matches up with yesterday's Australian result. But yesterday Beijing released its April trade balance which showed a greater than expected swing back into surplus at US$11.4bn. Supported by a manipulated currency, Chinese exports surged again while its imports of raw materials – copper, iron ore, aluminium – dropped off.

This may well imply Australia's April trade balance will be less weighted to the surplus side, assuming there's any accuracy in Beijing's numbers. Is the PBoC's tighter monetary policy starting to bite? Or is this just a seasonal effect? China typically re-stocks inventories early in the year.

Today brings the monthly Chinese “data dump” of production, sales, investment and inflation numbers. The CPI is expected to tick down to 5.2% from 5.4% so any upside surprise may not be well received. It just so happens that the Geithner-Clinton show was in China yesterday, trying hard to encourage revaluation of the renminbi while not being seen to throw stones from a glass house.

There was never going to be a lot of local market reaction ahead of last night's Budget, although the Chinese data did little to inspire the stock market and a recovering Aussie continued to provide a drag. The Budget itself was largely underwhelming. Spending cuts were no tougher than leaks had suggested and the overall reduction will not be enough to alter central bank policy. The Aussie is slightly higher over 24 hours at US$1.0837, so rate rise expectations did not much change. (The US dollar index finished slightly lower last night at 74.54.)

Everyone except Joe Hockey welcomed the suggestion of a return to a small surplus in FY13, but everyone outside politics knows that FY13 is the “never never” and butterfly flaps of commodity prices and the currency can cause a tsunami of altered expectations at anytime in the interim. And we still haven't settled the issues of carbon tax and mining tax.

The SPI Overnight is the closest thing we have to a pre-opening reaction to the Budget, and it rose 47 points or a solid 1% last night. There's not a lot of point comparing this to the 0.8% gain in the S&P 500 given the two markets have been completely divergent now for some time given the impact of the strong Aussie. So no major Budget surprises, or big hits to any specific sector, appears to be a positive. On the flipside, this was very much a jobs budget and any strategy to ease the inflationary pressure from labour costs in the resource sector has to be a positive, albeit such initiatives are a more medium to longer-term than short-term solutions.

Oil continued to rebound last night as the ever rising waters of the Mississippi further threatened supply-side constraints. Not only do oil refineries dot the Mississippi shores but crude oil pipelines lead in and the river is a transport corridor for tankers. The Libyan battle is not helping, so last night West Texas rose US$1.10 to US$103.65/bbl and Brent rose US$1.73 to US$117.63/bbl.

It was a quieter session for precious metals last night. Gold rose US$2.90 to US$1516.40/oz while silver rose only 1.6% to US$38.47/oz. For silver, that's as good as standing still.

It was a month ago when Goldman Sachs announced to the world it was time to take profits on commodities, but the Goldmans traders are clearly now back in because last night the world's most influential investment bank declared the recent sharp pullback to be enough to now offer upside once more. Base metals were encouraged by this declaration, but also discouraged by the Chinese trade balance. LME movements were thus again mixed with 1% increases in aluminium, lead and nickel.

The energy and material sectors were stronger on Wall Street last night but when one influential hedge fund manager declared US banks to be undervalued, the financial sector decided to play along for once. The big news on the Street last night, however, was a US$8.5bn bid by Microsoft for VoIP leader Skype. This fired up the tech sector and sentiment in general.

There was solid demand for the US Treasury's auction of US$32bn of three-year notes last night despite the settlement yield of 1.00% being the lowest this year. Demand was largely domestic nevertheless, with foreign central banks picking up a consistent 33%. The benchmark ten-year yield rose 4bps to 3.20% after several days of yield weakness, and tonight the Treasury will auction US$24bn of tens.

As noted, the SPI Overnight was up 47 points or 1.0%.

We now await the Chinese data dump, and CSR ((CSR)) will report its full-year profit today.

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