The Overnight Report: Apple, China And The Bernanke

This story features FORTESCUE LIMITED, and other companies. For more info SHARE ANALYSIS: FMG

By Rudi Filapek-Vandyck, Editor FNArena

The S&P500 closed at 1470.68, down 1.37 points, while the Dow Industrials closed at 13507.32, up 18.89 (0.14%) and the Nasdaq lost 8.13 points (0.26%) to close at 3117.50. SPI futures are indicating a flat opening for Australian equities on Tuesday.

Yesterday, in afternoon trading on the local bourse, the early trend of buying pressure for defensives and dividend stocks and selling pressure on materials and energy stocks swiftly reversed. That allowed the ASX200 index to close with a larger gain than seemed on the cards in the morning. What happened?

In what appears to be the latest case of "hineininterpretierung" (never kill a good story simply because the facts don't add up). A rumour was going around the traps in Sydney that Friday's economic data in China will prove better than the market is expecting. Shanghai equities stormed out of the gates with 2% gains from the get-go.

By the end of Monday's session, Shanghai had clocked up more than 3% in gains, but it had little to do with the rumours in Sydney. China is feeling the pressure to reform its financial markets, necessary to build tomorrow's safe haven destination for global investment funds, and the chairman of the China Securities Regulatory Commission (CSRC) had been making comments about further liberalisation of China's financial markets. That's why Chinese shares were in a joyous mood.

There were reports in the Chinese media quoting a government official who predicted official GDP growth would print 7.7% for calendar 2012 and next year would see a similar figure, but with the suggestion that momentum right now is picking up pace.

Traders in Australia and in London didn't ask any further questions and swiftly moved into obvious direct correlation trades. What's good for China must be good for Fortescue Metals ((FMG)), Rio Tinto ((RIO)) and Woodside Petroleum ((WPL)), as it must be for the prices of copper, nickel and crude oil!

Momentum hit a wall later on the day, however, on reports that indicated technology powerhouse Apple has been cutting orders for all kinds of third-party components that go into the latest iPhone 5, suggesting global sales are not matching expectations. Is Apple feeling the pinch from Samsung? Or is there something more ominous going on? Apple shares dived 4% pre-opening and pretty much kept the pressure on the technology sector for the whole session. The price is now near US$500 which makes this probably as opportune a time as any to bring back memories of last year when parabolic rallies were de rigeur and stockbroking analysts were setting price targets as high as US$1000 for the stock.

Another tech heavyweight, IBM, received a prominent stockbroker downgrade, which further contributed to the subdued price action. The day's good news story in the tech corner came from embattled pc marketer Dell, which is planning to take itself off the market and continue life as a private enterprise. Hewlett Packard, another embattled icon from the Golden Nineties for the sector, also rose on the news, keeping the Dow Industrials in positive territory.

Equally disconcerting was yet another sign of an increasingly combatant US President who pretty much tried to ring fence upcoming negotiations about the debt ceiling by shifting the full blame on Congress. Obama signalled Congress (read: Republicans) were being childish for not wanting to pay the nations bills that had already been committed to. Here's what Senate Minority Leader Mitch McConnell had to say about it. "The president and his allies need to get serious about spending, and the debt-limit debate is the perfect time for it.”

Get ready for more of the same in 2013.

In M&A news, global transport bellwether UPS decided to abandon its US$7 billion bid for Dutch competitor TNT Express (origin: Australia), while Swatch is buying luxury watchmaker and jeweler Harry Winston for US$1 billion. Harry Winston, by the way, has been the only equity market exposure that has proved a sustainable, successful leverage to the diamond industry over the past three decades, globally. And now Swatch is offering one final opportunity.

Meanwhile, and as also flagged yesterday, the more eye-catching movements are happening in FX markets where traders -apparently- are deciding less risk averse positions are more appropriate. In overnight markets, funds flowed out of the Swiss Franc, while the British Pound endured selling pressures too. The US dollar was mixed against major currencies in European and US trade on Monday. The Euro fell from highs near US$1.3390 to US$1.3335, and was around US$1.3375 in afternoon US trade. The AUD held between US105.45c and US105.75c and was near US105.65c in afternoon US trade. And the Japanese yen lifted from 89.62 yen per US dollar to JPY89.08, and was trading at JPY89.39 in the afternoon US session.

Movements in commodities were messy and on low volumes. Base metals in London closed lower, but crude oil received support from a Saudi announcement of output adjustments (read: reduced supplies). There was a slight positive tone for gold.

Not helping was the announcement that Eurozone industrial output fell 3.7% year-over-year in November, the biggest decrease since November 2009. Silvio "Bunga Bunga" Berlusconi is polling well ahead in the Italian elections. UK business confidence fell to 90.3 in December, from 91.4 the previous month according to a report from accountancy firm BDO. A measure of output also declined to 93.1, below the 95 reading that indicates positive growth.

Adding further to the overall subdued sentiment was Chicago Federal Reserve President Charles Evans, who predicted the US economy will grow by 2.5% in 2013 and by 3.5% in 2014, with unemployment to decline to 7.4% this year and to 7% in 2014. Further improvements in the US economy might trigger an earlier than anticipated re-think at the Federal Reserve and that's not what investors want to hear about.

US Treasuries continued to rally moderately at the long end, supported by Fed Reserve purchases of USD1.47bn of longer dated bonds overnight and -apparently- on speculation Bernanke will reaffirm the Fed’s bond purchasing scheme when he speaks this morning. The 2-year bond yield was unchanged at 0.25% while the 10-year yield declined 2bps to 1.85%.

All eyes are now on Fed chairman Ben Bernanke's scheduled speech at the University of Michigan at 4:30pm. There's nothing else on the calendar, domestic or elsewhere, worth your attention today with the exception of Rio Tinto's scheduled production update. (Bernanke's probably speaking live on Financial TV as you are reading this report).

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