The Overnight Report: Back To Business

This story features RIO TINTO LIMITED. For more info SHARE ANALYSIS: RIO

By Greg Peel

The Dow closed up 55 points, or 0.4%, while the S&P gained 0.7% to 1558 as the Nasdaq added 0.8%.

The Cyprus solution remains in disarray, with banks on the island now closed until Tuesday. Despite a rejection of the bail-out plan including a universal levy on bank deposits being rejected by the Cypriote parliament, a flight of capital is still expected as soon as bank doors open unless some alternative solution can be agreed upon in the interim.

There is much talk of protecting smaller deposits while taxing larger ones, but “constructive” talks between the Cypriote and Russian finance ministers hint at a possible loan from Russia as an alternative to taxing the high level of Russian deposits held in Cypriote banks. There is also the possibility of Cyprus selling state gas reserves to Russia, or the possibility of Cyprus exiting the euro, but given the stubborn retention of Greece within the eurozone, the latter is not considered a likely outcome. The ECB has promised to provide Cyprus with liquidity in the meantime.

Wall Street, nevertheless, sails merrily on. Last night the Fed shocked no one by leaving its monetary policy stance unchanged, with the funds rate to remain near zero and the US$85bn per month bond purchase program (QE3) to continue.

The update of the Fed’s quarterly forecasts showed a projection the US unemployment rate will fall to 6.7-7.0% by end-2014 and 6.0-6.5% by end-2015. The low funds rate has long been slated to stay in place until 2015, or until unemployment falls to 6.5%, which on these projections is the same thing. The Fed slightly lowered its GDP growth forecasts, dropping its 2014 expectations to 2.9-3.4% growth from the 3.0-3.5% range previously assumed. According to last night’s statement, the central bank expects “a return to moderate growth following the pause late last year”. The US economy was flat in the December quarter.

Wall Street had opened higher from the bell, but then drifted all morning as traders awaited the Fed statement in the afternoon. On its release stocks spiked, for a Dow peak of up 90 points, before easing back again to the close.

Cyprus continues to be laughed off by many as an insignificant flea of an economy, while others continue to fear the ramifications across Europe of whatever the latest disaster-riddled plan might be from European politicians. The former camp is currently winning, with the euro recovering 0.4% last night have fallen to what was considered an oversold position. The US dollar index is down slightly at 82.85. There was also a slight retreat from safe havens last night, with the US ten-year bond yield rising 3bps to 1.94% and gold falling US$6.90 to US$1606.00/oz.

Base metals also rebounded, with copper leading the charge on a 1.5% gain. Tin was left on the blocks nevertheless. The oils also traded higher, with a surprise drop in US weekly inventories providing the spur after Tuesday night’s big falls. Brent is up US$1.26 to US$108.71/bbl and West Texas is up US98c to US$93.50/bbl.

Goldman Sachs put the fear of God into iron ore investors yesterday after a downgrade to Conviction Sell for Rio ((RIO)) emerged from London (but not matched in Sydney) following a downgrade to iron ore price forecasts. The spot iron ore price is down US30c to US$134.10/t, but not because Chinese traders hang on Goldman’s every word.

The SPI Overnight is up a healthy 21 points, or 0.4% after a wobbly day yesterday on the physical market. March SPI futures and options and physical index options expire today, which can sometimes cause some argy-bargy.

It’s flash day today, with manufacturing PMI estimates due from China (HSBC) and later the eurozone and US.

Rudi will appear on Sky Business at noon.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

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.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms