The Overnight Report: Back To (Fed-Fuelled) Business

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By Greg Peel

The Dow closed down 2 points while the S&P gained 0.7% to 1733 and the Nasdaq added 0.6%.

No one was entirely sure just how Wall Street would react last night to the reopening of the US government on a can-kick basis. It went close to the wire, but then it always does, so no real surprise there. But it all starts again in the New Year. Will the government shut down once more? No one much thinks so. Most believe all parties, and particularly the Republicans, have learnt a difficult lesson.

On that basis, the stock market felt free to rally once more. It’s not only a matter of not expecting the same charade at the next deadline, it’s a case of assuming the Fed would not even now consider tapering until at least March. It’s as if we suddenly now have QE4.

It was not a smooth start to the session, nevertheless. Amidst all the angst in Washington, the US September quarter result season has been gearing up. Last night saw disappointing results from Dow components IBM (down 6%) and newbie Goldman Sachs (down 2%) which helped the Dow down 144 points from the open. EBay (down 4%) added to the gloom with a cut to its fourth quarter outlook. There was nonetheless some counter, with Dow components American Express (up 5%) and Verizon (up 3.5%) posting beats.

So big is Big Blue, its fall was worth 90 Dow points. That’s why the price average index is not considered any more than an historical curiosity, and the cap-weighted S&P 500 is taken as the true market indicator. After a slow start, the broad market index ultimately took out both the previous closing and intraday highs set on September 18, pre shutdown.

There remains concern that the shutdown period and its echoes will trim a good slice off the US fourth quarter GDP. There also remains a concern US companies will use the shutdown as an excuse to slash their fourth quarter guidance, cutting the “E” in already inflated PEs and sparking a sell-off. But there seemed to be little concern last night.

Wall Street has the Fed back in its corner, at least for another couple of quarters. Throughout the shutdown period, the US dollar did not move much. Even as it appeared on Wednesday night a deal was about to be reached in Washington, the greenback held steady. But with confirmation of a compromise, and the assumption of extended QE, last night the dollar index plunged 0.9% to 79.65.

As a result, gold jumped US$40.10 to US$1320.10/oz. The US ten-year bond yield fell 8 basis points to 2.59%. And the Aussie – a victim of this whole debacle – jumped 0.8% to US$0.9628.

Back in the real world, The Philadelphia Fed index showed a fall to 19.8 from 22.3 in September, but still comfortably beat expectations of 15.0. The government reopening meant jobless claims data is back and last week saw a fall of 15,000 to 358,000. But traders are wary of any data releases for the time being, given the impact the shutdown would have had not just on the numbers, but on the actual collection of the data as well.

Commodity markets played the realist card last night, ignoring the fall in the US dollar and reflecting on the damage the shutdown has potentially caused. Base metals were mostly a little lower, while a reported increase in weekly US crude supplies helped Brent down US$1.63 to US$108.95/bbl and West Texas down US$1.63 to US$100.66/bbl.

Spot iron ore rose US70c to US$134.40/t.

Bridge Street started strongly yesterday on expectation of the deal being passed, but elected to play it safe just in case and drifted back. Confirmation, and subsequent strength on Wall Street, means the SPI Overnight closed up 30 points or 0.6%.

But hang onto your hats, it’s China GDP day. Yes, remember China? Economists are forecasting a 7.8% year on year growth rate, up from the June quarter’s 7.5%. The monthly dump of industrial production, retail sales and fixed asset investment data is also due.

Glenn Stevens will make a speech to a business gathering today, and we may hear what the RBA governor thinks about the US farce and its impact on local monetary policy. The Aussie is up over six cents from its lows.

Qantas ((QAN)) will hold its AGM today and Santos ((STO)) will release its quarterly production report.

America is back in business, but just how well will that business recover?

Rudi will make an appearance on Sky Business later today, 7-8pm, on Your Money, Your Call – Bonds versus Equities.
 

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