The Overnight Report: The Great Unknown

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By Greg Peel

The Dow fell 97 points or 0.8% while the S&P fell 0.5% to 1343 and the Nasdaq lost 0.6%.

The US Federal Reserve has been adopting a new model of transparency under chairman Ben Bernanke's reign which, aside from Mr Bernanke's four-a-year press conferences, now includes disclosure of the views of each of the Financial Open Market Committee members at the six-weekly monetary policy meetings. Not only do we learn what the vote count for and against any particular policy initiative was, we are now provided with a summation of the reasoning behind each member's vote.

The question is: is this a good thing? The world has clearly long ago given up on any fantastic idea of politicians being those in whom we can place our trust to lead us through the difficult times which, from a global economy perspective, leaves only central bankers as those who we like to believe have a firm hand on the rudder with wisdom as their guide. So when the voting members of the most influential central bank in the world can't decide what to do, where does that leave the rest of us?

The point at issue here is QE3. Do the US and global economies need more funny-money stimulus to ward off disaster or don't they? There has been much talk of late of improving US economic data, which is reflected in the 20% Wall Street rally from the lows of last year. But each time the Fed speaks up, it downplays that optimism. On that basis, Wall Street forms the opinion that QE3 may not be far off, or at the very least the missiles have been set to active. Yet the minutes of the last Fed meeting, released last night, portray a board split on if and when the Fed balance sheet will be reduced – the unwinding of QE. Not before 2015, following the stated extended period of zero interest rates, say half the members. Before 2014, in order to avoid a spike in inflation, say others.

As I have often noted in this Report, the financial markets' biggest enemy is uncertainty. Why does no one much want to play in the stock market at present, despite the aforementioned rally? Because no one – absolutely no one – has any real idea of where the world is headed. There are lots of opinions of course, and uniform disagreement. Investors across the world have thus responded by staying the hell out. Maybe the world would feel at least a little more comfortable in thinking the Fed has the matter under control, rather than knowing the board is divided, even if policy decisions prove unwise in retrospect.

Within the past week, both the UK and Japan have announced more quantitative easing – more money printing in effect. The more one economy is stimulated, the more other economies have to also consider stimulus lest they be left behind in the world of global trade. In the meantime, there is still no answer on Greece. The EU finance ministers have postponed their decision on whether or not to give Greece another funny-money hand-out, mostly because the Germans just don't believe the Greeks can honestly stick to the austerity pledges they've made, particularly given there will be a new government in power in Greece in April.

I have my own simple solution to the Greek problem, but unfortunately nuclear weapons are frowned on these days.

Wall Street is trying very hard to forget about Greece, and Europe in general. The aforementioned rally to this point includes an assumption that Europe will not collapse. Let's just get on with, the markets are trying to say. But Europe is still there, and it seems there's absolutely nothing investors can do about it. Having shifted thoughts of Greece aside, Wall Street has been trying this week to focus on Apple – that peerless corporate wunderkind which is now the second biggest stock by market cap in the US and 15% of the Nasdaq (yet not in the Dow). Since the GFC, Apple's share price has continually pushed to new highs. First it was the iPod, then the iPhone, and now the iPad. This week Apple has had a couple of attempts at getting past the US$500 per share mark and into further blue sky. Round numbers are merely psychological, yet US$500 seems a bridge too far at this point. Can Apple really just keeping rising in the current global market place?

Wall Street rose from the bell last night despite a lack of progress in Europe, having learned that China is prepared to help out. When Apple made another attempt to push beyond US$500 it was met by selling. When the Fed minutes were released mid-session, indicating not only uncertainty among the board members but also more talk of reducing QE rather than increasing it, there were two good reasons to sell the market. The 20% rally to date is a third reason. The technical and psychological level of 1350 in the S&P 500 is another. In the afternoon it appeared likely the Dow would fall by a triple digit amount for only the second time in 2012. In the end, it didn't quite get there. Global financial markets are currently struggling to find a good reason to go either up or down.

Movements in other markets were not significant last night. The US dollar index was up 0.3% to 79.65 as expectations of QE3 again waned but the Aussie is little changed at US$1.0689 and gold is US$7.70 higher at US$1727.20/oz. Base metals fell a percent on average. West Texas rose US$1.30 to US$102.04/bbl but Brent was only up US23c to US$118.67/bbl. Global bond yields really didn't do much, although the VIX has now ticked up to 21.

The SPI Overnight was down 36 points or 0.9%.

Back to local news today, with a big slab of earnings reports due out including Qantas ((QAN)) and Wesfarmers ((WES)) and a quarterly update from Westpac ((WBC)). And we'll see the January unemployment numbers.

Rudi will be on Sky Business today at noon.

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