The Overnight Report: Correction Over

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By Greg Peel

The Dow rose 169 points, or 1.1%, while the S&P gained 1.4% to 1675 and the Nasdaq added 1.6%.

There is nothing new to report with respect to Wall Street last night that we didn’t already know ahead of the opening on Bridge Street yesterday. Ben Bernanke’s soothing words (ie the US economy is not looking all that great) came after the closing bell on New York and Asian time zone markets became the first response team.

There remains an irony that over the past several months neither the Fed policy statements, Bernanke himself nor any of the Fedheads have actually changed the tune. The central bank’s intentions remain exactly as they were earlier in the year: we will withdraw stimulus if the economy recovers as expected and add stimulus if the economy falters. But a new arrow has been added to the Fed quiver, that of greater disclosure/guidance. In today’s fast moving world of computers and algorithms, unbridled and unsubstantiated speculation has increased volatility to uncomfortable levels.

So it was that when stock prices and house prices pushed into what many considered overbought territory, driven by QE backing rather than earnings fundamentals, Bernanke decided to cool things down with the suggestion of a tapering timetable. It worked. Perhaps what he wasn’t expecting was the very severe correction in bond prices, with higher market interest rates (mortgage rates for example) themselves becoming an economic threat. How to put a cap on runaway bond yields? Remind the market that the US unemployment numbers really don’t look that good at all.

It’s all a bit of a balancing act, as we can see by last night’s market movements. Having hit 2.69% between the release of the minutes and Bernanke’s speech on Wednesday, the US ten-year bond yield has since fallen 11 basis points to 2.57%, with most of the fall occurring as Bernanke spoke. But the stock indices are now back to where they were in May, with both the Dow and S&P closing at new all-time highs and the Nasdaq at a 13-year high. Wall Street initially corrected on tapering talk, but later decided less QE implied a healthier economy which could only be a good thing. So the win-win theme continues.

There was one data highlight last night that did nothing to upset the rally. June US chain store sales showed a 3.9% year on year increase, which is the best result since January’s 4.5%. After January the numbers dropped on sequester measures being introduced. Those measures are still in place, but US consumers appear to have now adjusted to the fact.

Wall Street step-jumped higher on the open and basically stayed there all session, and was the last major market to have the chance to respond to its own central bank. Australia was first off the blocks yesterday (okay sicond, eh) and as the US dollar fell in late trading it was a case of “risk on” writ large. The day before we were all so worried about weak Chinese trade data. Yesterday the materials sector led the charge, eclipsing all other indices with a 3.4% gain as BHP Billiton ((BHP)) jumped 3.2% and Rio Tinto ((RIO)) jumped 3.7%. Unable to join in the fun were the healthcare and consumer staples sectors – the defensives.

The gold sub-sector definitely did join in the fun, given the US$31.40 rise in the gold price over 24 hours to US$1286.60/oz, which all occurred in the Asian time zone. The question now is: do we keep going up today on Bridge Street? Wall Street was only catching up. Well gold is no higher, but what we did see overnight was a 3% jump in the copper price. The LME had closed before Bernanke’s speech on Wednesday. In New York, BHP was up 6.0% last night and Rio 6.9%.

The Chinese stock market was also up yesterday, posting a 2013 record up-day of 3.2%. This seems at odds with the weakness in recent Chinese data, but maybe this Shanghai index chart holds some clues:

Here we can see the tail of the 2012 drift-off on slowing Chinese GDP growth, followed by a bounce on the regime changeover as the new team talked up its economic plans. The world, and clearly Chinese investors, were expecting fresh stimulus. By February it became apparent this wasn’t going to happen, and instead Beijing began clamping down on fraud, corruption and speculation, culminating in June with the short-term credit squeeze. After this week’s weak data economists are suggesting stimulus must come soon, and it seems perhaps Chinese investors are now assuming the same. They, too, can be “bad news is good news” traders. And technically, that’s a nice bounce off support.

The US dollar index tanked on Bernanke’s speech yesterday morning (our time) and is down 1.1% to 82.74. The Aussie traded well above 92 yesterday, but has settled back to be up 0.4% at US$0.9191. Base metals shot up on the open on the LME last night but all fell back again to post negligible gains, except copper which breached the psychological US$7000/t mark. It won’t hurt the materials sector today that spot iron ore is up US$1.30 to US$125.20/t.

The oils eased off for once after a very strong rally over recent sessions, with Brent down US44c to US$107.54/bbl and West Texas down US$1.92 to US$104.60/bbl.

The SPI Overnight is up 37 points, or 0.4%. Bridge Street risks responding to the same news twice, although we appear to be seeing more of a mood-shift than a one-off event. A mood-shift, that is, back to where we were earlier in the year.

Housing and investment finance data are out today in Australia, while Japan will release industrial production data and Europe will follow suit tonight.

Alcoa is one thing, but most consider the US earning season to begin in earnest tonight as the banks begin to report, with JP Morgan (Dow) and Wells Fargo first off the rank. QE is la-la land, earnings are a reality.

Rudi will appear on BRR Media’s Round Table today at 1pm.

Technical limitations

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