The Overnight Report: A Pause In The Correction

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By Greg Peel

The Dow closed down 5 points while the S&P fell 0.2% to 1751 and the Nasdaq lost 0.5%.

Bridge Street remained soggy yesterday, failing to follow the bounce on Wall Street on Tuesday night. The market weakened into the afternoon after the release of HSBC’s service sector PMI for China, which showed a fall to a two-year low of 50.9 from 52.5 in December. HSBC’s number was consistent with the earlier official release.

The good news was a rise in Australia’s own services PMI, to 49.3 from 46.1. The result indicates an industry still in contraction, but the pace of that contraction has slowed.  A break above 50 would indicate the first expansion in two years.

Elsewhere, service sector results were on the expansion side of the ledger. The eurozone continues to confuse, with its services PMI rising to 52.9 from 52.1 – consistent with manufacturing expansion but belying the eurozone’s dangerously low inflation rate. The UK continues to consolidate its position of strength, with its PMI falling to 58.3 from 58.8 but remaining in solid expansion territory. The US held its breath following Monday’s weak manufacturing PMI, which helped trigger the big sell-off, but a result of 54.0, up from 53.0, helped stop the rot.

The Dow was down over 100 points early in the session when the PMI was released, along with the ADP private sector jobs number for January. ADP reported 175,000 new jobs added, down from 227,000 in December and the lowest number in five months. But since the surprisingly weak December non-farm payrolls release a month ago, Wall Street has come to realise just what effect unusually heavy snow is having on economic data.

It makes sense that crippled transport and impassable roads would impact on manufacturing industries but not so significantly on service industries, while the need to hire or the ability of the unemployed to even get out to find jobs would clearly be compromised. That’s what Wall Street is telling itself, at least, as we wait for the January non-farm payrolls number due tomorrow night.

The data releases were at least enough to stem the tide on Wall Street and affect a bounce back to the flatline by midday. As to whether a bottom is now being established post a sufficient 5% pullback, or whether this is just a breather in what should ultimately prove a 10% correction, is the general topic of debate at present.

The earnings report highlight of the day came after the closing bell, in the form of the debut report from Twitter as a public company. Twitter is not yet profitable so it’s all about revenue and user numbers. Bearing in mind Twitter shares are up 150% since listing late last year, the after-market response to the result was an initial 6% jump which quickly swung to a 10% loss in the first minutes.

The US ten-year bond yield continues to graft its way back from recent steep falls, rising another 4 basis points last night to 2.67%, which has roughly been the comfort zone so far in 2014. The US dollar index continues to go nowhere in a hurry, and it fell 0.1% to 81.05. Gold ticked up US$3.50 to US$1258.50/oz and after its huge jump yesterday, the Aussie is off 0.3% to US$0.8913.

Base metals have finally gone quiet as one would expect during the Chinese holiday, following earlier volatility, while Brent crude rose US23c to US$106.21/bbl and West Texas rose US21c to US$97.40/bbl.

The SPI Overnight is looking a little more optimistic this morning, up 14 points or 0.3%.

NAB’s monthly business confidence survey is out today locally along with the all-important December retail sales numbers and the trade balance. Earnings result highlights today include Tabcorp ((TAH)) and Flexigroup ((FXL)) while Woolworths ((WOW)) will report its December quarter sales result.

Rudi will appear on Sky Business at noon and again between 7-8pm (Switzer).
 

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