The Overnight Report: Dow Hits All-Time High

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

By Greg Peel

The Dow rose 111 points or 0.7% while the S&P 500 gained 0.6% to 1771 and the Nasdaq added 0.3%.

“The foreign exchange market is perhaps another area in which investors should take care. While the direction of the exchange rate's response to some recent events might be understandable, that was from levels that were already unusually high. These levels of the exchange rate are not supported by Australia's relative levels of costs and productivity. Moreover, the terms of trade are likely to fall, not rise, from here. So it seems quite likely that at some point in the future the Australian dollar will be materially lower than it is today.”

And on that note, the Aussie fell a cent.

If such a fall wasn’t so beneficial to the Australian economy at present it would be amusing, given this remark made by Glenn Stevens at a Citi conference yesterday is no different to comments made in the RBA governor’s last several monetary policy statements. For months Stevens has suggested the Aussie must eventually be materially lower. Clearly the market is long.

It was also fortuitous that the US dollar index traded higher last night, up 0.4% to 79.65, as other major currencies fell. There was a raft of US economic data released last night, both delayed and on schedule. The delayed data is being seen as largely irrelevant given it represents the pre-shutdown period, while fresh data is clearly impacted by the shutdown.

Retail sales fell by 0.1% in September to mark the first fall in six months but only because lumpy auto sales saw a rare dip. Sales ex-autos otherwise rose 0.4% to mark the biggest increase this year. The headline PPI fell 0.1% in September on lower food costs when a 0.3% rise was expected but the core reading rose 0.1% as expected. The Case-Shiller house price index rose 1.2% month on month in August, which is the smallest gain since March, but rose 12.8% year on year to the fastest pace since early 2006.

The Conference Board consumer confidence measure for October plunged to 71.2 from 80.2 in September to mark the lowest level in six months. Of all last night’s data, this is the only post-shutdown reading.

The simple reality is that before the shutdown, economic data were of vital importance. Data would determine the Fed’s monetary policy stance. After the shutdown, they mean little. Tapering is expected to now be held off until at least March, while others say June, and yet others say never and suggest QE may even be increased next year under new chair Janet Yellen. And that’s notwithstanding we are yet to go through another partisan fiscal battle early next year, which some are dubbing World War II.

So no one cares about the data anymore. What Wall Street does care about is that as we move past the halfway mark in the US quarterly earnings season, 70% of S&P 500 companies reporting to date have posted an earnings beat and 40% a revenue beat. Earnings are up 4.25% year on year. Lagging revenue growth remains a concern, but at least there are signs of improvement. Last night it was Pfizer’s (Dow) turn to post a solid result, while IBM (Dow) announced an additional US$15bn stock buyback.

The Dow Jones Industrial Average of 30 stocks is more of a historical curiosity these days, replaced in relevance by the cap-weighted S&P 500. But it still has psychological clout, and last night’s rally took the average to a new all-time high, surpassing October 2007. The S&P first achieved such a result in April and has pushed a lot higher ever since.

We now have all of the S&P, Dow Jones Industrial, Dow Jones Transport, and Russell 2000 (small cap) at new all-time highs. The Nasdaq is at something like a decade high but still a long way off the dotcom peak in 2000. New all-time highs for both the major Dow averages is technically significant if you are a follower of Dow Theory. And Jupiter aligns with Mars.

On Monday night Wall Street seemed happy to just sit back and wait for the Fed meeting to conclude tonight. Perhaps traders then wondered, what could Bernanke say that would be negative for stocks? So they bought it again last night.

The stock market is certainly where all the action is at present. The US ten-year bond yield is currently stable around 2.5% while gold fell back US$6.80 last night to US$1346.30/oz on the stronger greenback. Base metals were once again mixed on small moves, while the oils took a look at the weak US consumer confidence number and fell, with Brent down US60c to US$108.83/bbl and West Texas down US42c to US$98.26/bbl.

Spot iron ore fell US50c to US$131.30/t.

The SPI Overnight rose 26 points or 0.5%. And the Aussie is down 0.9% to US$0.9479.

While Wall Street might be assuming the Fed cannot say anything negative tonight, the world will still be interested to hear just what the FOMC has to say about US fiscal issues and their impact on monetary policy.

In Australia, AWE ((AWE)) and OceanaGold ((OGC)) will release quarterly production reports while JB Hi-Fi ((JBH)) will provide quarterly sales data at its AGM today. IAG ((IAG)), Crown ((CWN)), Flight Centre ((FLT)) and Atlas Iron ((AGO)) are among the many companies also holding AGMs today.

Rudi will appear on Sky Business from 5.30pm.
 

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