The Overnight Report: Upward Vacuum

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By Greg Peel

The Dow rose 85 points or 0.7% while the S&P gained 0.7% to 1415 and the Nasdaq added 1.0%.

We have now reached 1415 as a closing price on the S&P 500, which in theory is a significant technical level that if breached, would signal an upside break. Interestingly, the indices were a little higher just before the death – the Dow was up over 100 – which would tend to suggest this technical level is a good place to take profits.

And it's not hard to see why traders may wish to take profits. Since global markets adjusted to Draghi's comments last month and anticipation of ECB intervention affected a step-jump in markets, indices have done little more than drift higher ever since what has largely been a headline vacuum. And for the past three years, the global market has been driven by little more than headlines.

Angela Merkel was in Canada last night and, when prompted, suggested European officials needed to act quickly and that “we feel committed to do everything we can to in order to maintain the common currency”. Despite this response being triggered when someone pulled the string in Angela's back, markets decided this was wonderful news. Never mind that Angela has said nothing else for months.

On the subject of central bank action, yesterday's data on foreign direct investment into China were poor. The flow of investment contracted by 8.7% in July year on year, following a 6.0% yoy contraction in June. Actual inflows totalled US$7.6bn to take the year to date number to US$66.7bn and that's no to be sniffed at, but the pace of foreign investment in China is slowing. Nevertheless, all that matters is that Wen Jiabao was visiting Zhejiang province yesterday and, when prompted, suggested that he saw scope to ease monetary policy further. But again, this is all anyone has been expecting for about a year.

Back in the real world, Dow component Cisco is a late-cycle earnings reporter and the company released a solid set of results and guidance after the bell on Wednesday. Last night Cisco shares rallied 10%, dragging up both the blue chip average and a sympathetic Nasdaq. The late reporters have tended to provide reasonable results this season, although Wall Street seems to be forgetting that the season has provided very flat results and cautious guidance on average.

It was not a great night for US economic data. Jobless claims ticked up a tad, and July housing starts fell by 1.1%. Wall Street was not fazed by the dip in starts, nevertheless, given June saw a surprising 6.8% jump and these numbers do bounce around. What's more, July brought a 6.8% increase in building permits – the precursor to starts – which bodes well for data in the next couple of months.

The most influential of the Fed region manufacturing indices is the Philadelphia index, and it has registered minus 7.1 for the month. That's up from minus 12.9 last month, but the fourth month of contraction in a row.

So if you add it all up, should the Dow be up 85 points? Cisco aside, the news wasn't all that bad, but it wasn't all that great either, and the comments from Merkel and Wen were very old news. The problem, of course, is a complete and utter lack of volume on Wall Street. Aside from a bit of profit-taking from short-term traders, no one is around to sell because (a) they're on vacation and (b) they're not going to risk selling into ECB intervention anyway. On the other hand, reasonable US data and constant motherhood statements from Europe have been enough to bring in some buyers, and with no sellers about, those buyers do tend to push indices higher. A rally on no volume does not represent a bull market, and right now the air is rarefied.

The ECB is the most critical element, but we also need to await the outcome of at least one, if not two, constitutional challenges in Germany as to the existence of the ESM and Germany's contribution to it. And that's before we can talk at all about possibly leveraging the ESM. The outcome of the first challenge is due some time in September.

Merkel's comments gave the euro a boost last night, so the US dollar index fell 0.3% to 82.39. Gold thus jumped US$1615.60/oz, while the Aussie is steady at US$1.0512. The US ten-year bond yield ticked up another 3bps to 1.83%.

Base metals were mixed, with tin and zinc falling by 1% while the others rose by 1%. Oil was again stronger, with West Texas up US90c to US$95.23/bbl. Brent has rolled over into the October delivery front month, and it was up US96c to US$115.27/bbl.

The SPI Overnight was up 24 points or 0.5%.

Local earnings report highlights for today include QBE ((QBE)) and Santos ((STO)), while ANZ Bank ((ANZ)) will provide a quarterly update.

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