The Overnight Report: Resolution Pending?

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By Greg Peel

The Dow closed up 64 points or 0.4% while the S&P gained 0.4% to 1710 and the Nasdaq added 0.7%.

The breakdown of talks between Obama and Boehner on Saturday and the failure of the Senate party leaders to nut out a compromise on Sunday meant a weak but not overly panicked session on Bridge Street yesterday in anticipation of a negative response from Wall Street. US indices dutifully fell from the bell last night, with the Dow down around 100 points following big anticipatory gains late last week.

Then came news the president would meet at 3pm (NY) with the leaders of both parties in both houses. Wall Street smelt a compromise in the offing. With the economically damaging shutdown into its second week and the debt ceiling deadline approaching on Thursday, the eleventh hour is nigh. Washington likes its charades to fully play out the suspense. Wall Street was further enthused when news came through the president had postponed that meeting until sometime later in the day.

It seems strange that a postponement would be positive, but the leaders asked for time because they were close to actually reaching a compromise. That compromise, most assume, will simply involve the government being reopened and the debt ceiling temporarily raised for some period to allow further time for negotiations, rather than an actual resolution. Such is the way of things. In the meantime, the meeting is yet to occur as I write. So we wait.

Back in the real world, yesterday Beijing released an inflation number for October which was a bit stronger than expected. The CPI came in at 3.1% year on year when economists had pencilled in 2.8%. While a bit of inflation is a good thing – it suggests a growing economy – too much inflation raises the threat of Beijing needing to tighten policy once more, or at least not ease it. However the strong result was quickly dismissed as a blip.

Once again there is the matter of the National Day holiday week falling in September this year and October last year. Food inflation was the main contributor to the “beat”, with fresh vegetable prices soaring over 18%. China suffered severe flooding in some parts during the month.

So no panic there. The PPI, on the other hand, fell by 1.3% which was close to expectation. September represents the eighteenth consecutive month of wholesale deflation, although the pace of that deflation appears to be easing. All up, markets in the Asian zone were little moved by China’s inflation numbers.

The good news last night came from Ireland. While Greece has tended to hog the spotlight in bail-out terms since the GFC, and Spain and Italy have had their moments, we recall that Ireland was one of the first EU countries to go under post-Lehman, thus requiring a hastily arranged troika bail-out. Ireland’s life support is still in effect, but the Irish government has announced that as of next month it will no longer need further financial assistance. The country has built up enough cash reserves in the meantime to provide a sufficient buffer.

On yer Paddy.

Other markets were relatively quiet last night. The Columbus Day holiday in the US saw banks and the bond market closed and many market participants taking a long weekend. Columbus Day is to Italians what St Patrick’s Day is to the Irish, so there goes half of Wall Street for starters.

The US dollar index drifted another 0.2% lower to 80.30 and gold ticked up US$3.50 to US$1276.40/oz. The Aussie was nevertheless stronger on the Chinese inflation number, and is up 0.3% at US$0.9494.

Base metals were mixed in London and have been largely treading water throughout the US shutdown. Copper was up 0.8% but aluminium was down 0.5%. The oils were little moved for once, with Brent down US21c to US$110.80/bbl and West Texas up US11c to US$102.13/bbl.

Spot iron ore rose US50c to US$133.60/t.

Given Bridge Street was weak yesterday in expectation of the same from Wall Street, the SPI Overnight has closed up an enthusiastic 43 points or 0.8%.

We can only hope.

The minutes of the October RBA meeting are due out today, which will be carefully scrutinised by those watching an arguably overbought Aussie dollar. Rio Tinto ((RIO)) will release its quarterly production report while Telstra ((TLS)) will hold its AGM.

Tonight in the US, other than anything else, sees quarterly earnings reports from Citigroup, Intel (Dow), Johnson & Johnson (Dow), Coca-Cola (Dow) and Yahoo.

Heading into result season analysts were expecting a net 9.8% increase to fourth quarter earnings forecasts post the third quarter results. That number is likely to be whittled away by the shutdown, or perhaps the shutdown will be exploited by managements seeing an excuse to downgrade guidance and then look good on the actual result. That is the fear.

Rudi will appear tonight on Sky Business, 5.30-6.30pm, instead of tomorrow.
 

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