The Overnight Report: Bouncy Castle For Spring Break

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By Greg Peel

The Dow closed up 146 points or 0.9% while the S&P gained 0.8% with the Nasdaq rebounding 0.8%.

I suggested yesterday that the ASX 200 might find some stability around the familiar 5400 level and perhaps the Nasdaq-related sell-off might lose steam. Well the Nasdaq did post a 0.8% bounce in the US last night but yesterday the local market managed to hold 5400 only until lunchtime when, as the chart suggests, someone slammed it through. I also warned volumes would be thin, and they were. The afternoon saw cascading selling as has been the case often before.

But poor old Bridge Street just doesn’t seem to be getting it right lately. The ASX 200 shot up 100 points in the two days ahead of a 200 Dow point rout on Wall Street last week, then yesterday tanked 1.3% just ahead of Wall Street’s bounce last night.

Not that Wall Street’s bounce was enormously convincing, or evoked calls that “the bottom is in”. Volumes were also on the low side in the US (it’s Spring Break) and it took US stock markets two attempts to post a decent rally. At midday the Dow was up 158 points and just after 3pm it was only up 29 points before closing up 146.

The first bounce was fuelled by both economic and corporate news. US retail sales jumped 1.1% in March – their biggest monthly gain in 18 months — beating forecasts of 0.9%. The result was seen as a reprieve for everyone who blamed the weather for poor US data earlier in the year, although the February number was revised up to a 0.7% gain from the previously reported 0.3%, and it snowed in February.

Citigroup posted earnings per share of US$1.30, up from US$1.29 a year ago and well ahead of US$1.14 expectations. Citi shares closed up 4.4% and suggested to Wall Street that JP Morgan’s weak result, posted last week, may prove the exception in the banking sector.

On the strength of positive early news, and given the extent of the sell-off to that point, the buyers flooded in and pushed the indices to their highs at midday. But once again the sellers began to win the battle and it looked like all might be lost. Again we are facing that US economic conundrum of is good news good or bad? Good news means an improving economy, which is good in the longer term, but might also speed up Fed tightening which would be bad in the shorter term, assuming you’re a QE junkie.

The technical number to watch on the Nasdaq was 3985. Just after 3pm the Nasdaq hit 3986, turned, and took off like a rocket, dragging the other indices with it. Some of those computers are pretty quick.

End of the sell-off or a deceased feline? The big switch has been on from high-multiple growth stocks into staid large caps and value stocks, and into emerging markets, before a backdrop of stubbornly low US bond rates and before any theme has emerged from the earnings result season. We are still at a point where anything could happen and probably will.

One thing’s for sure. Wall Street is particularly self-centred at present. The weekend heightened fears of a full scale civil war in the Ukraine and subsequent global trade-crippling sanctions but the US stock market played its own game last night. The US ten-year bond yield rose 2 basis points to 2.64%. Gold nevertheless took foreign matters more seriously and rose US$8.60 to US$1327.30/oz despite a 0.3% gain in the US dollar index to 79.74, which was a result of more hollow stimulus threats from Mister All-Talk Draghi.

It was left to the energy markets to increase the geopolitical premium and only in the case of Brent crude, which rose US$1.80 to US$109.07/bbl. West Texas crude fell US18c to US$103.56/bbl which is fair enough given WTI means little to anyone outside the US (until it becomes fully exportable via pipeline construction/reversal) and nor does the Henry Hub natural gas price.

The base metal market has become decidedly fractured of late. Doctor copper continues to reflect wider global economic and geopolitical issues and remains stagnant. Nickel, on the other hand, hit a 14-month high last night with another 2.2% gain and that’s specifically all about Indonesian export bans. In between, aluminium and tin were quiet last night while lead and zinc decided to have a bit of a run, jumping over 1%.

Spot iron ore rose US10c to US$117.00/t.

Usually when Bridge Street has a Barry, as it did yesterday, we see a consequent fall in the Aussie reflecting offshore selling of local stocks. But no, the Aussie is up 0.3% to US$0.9423, supported by an Australian economy which seems to be weathering the ex-mining transition quite well so far and as a proxy for emerging market investment.

The SPI Overnight rose 25 points or 0.5%. Last time Wall Street bounced we shot up 1%.

On a more localised basis, today sees March quarter production reports from Rio Tinto ((RIO)) and OZ Minerals ((OZL)) and Insurance Australia Group ((IAG)) will provide a strategy update. The RBA will release the minutes of this month’s policy meeting which means everyone will be talking interest rate rise again (as in when), just as they are in the US.

In Europe the eurozone trade balance is due tonight – more fodder for Mister All-Talk perhaps, while inflation, housing sentiment and New York State manufacturing data will be closely watched in the US. Earnings results are due from Dow stocks Coca-Cola, Intel and Johnson & Johnson, along with Yahoo.
 

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