The Overnight Report: Safe In The Bosom

This story features SANTOS LIMITED, and other companies. For more info SHARE ANALYSIS: STO

By Greg Peel

The Dow rose 162 points or 1.0% while the S&P gained 1.0% to 1862 (to be back in the black for the year) and the Nasdaq rebounded a further 1.3%.

Bridge Street would have needed a moment or two to take in yesterday’s Chinese data release but in the end decided it was more positive than negative. Eventually there was a kick towards a more positive close, and the ASX 200 is once again sitting just above 5400.

China’s March quarter GDP came in at 7.4%, conveniently beating 7.3% forecasts. Industrial production for the month of March rose 8.8% (year on year) compared to 8.6% average growth over January-February. Retail sales rose 12.2% compared to 11.8%, while fixed asset investment fell to 17.6% from 17.9%.

It’s a bit of a mixed bag. The ongoing decline in fixed asset investment growth, which includes infrastructure projects, is not a great sign for those selling raw materials to China. Nor is a 25.2% year on year fall in new floor space under construction, which came out of the quarterly numbers. But infrastructure is one area at which Beijing can target any further stimulus if it sees fit, as is social housing. The fall in floor space is a two-edged sword, suggesting less demand for construction raw materials but an easing in China’s worrying property bubble.

In the end – fair to muddling. A stronger GDP would have been more positive and a weaker GDP would have implied fresh stimulus so might have been more positive as well.

Wall Street decided the numbers were okay and opened strongly from the bell. The materials sector in particular was in the spotlight, following a positive response from the Chinese data on the LME. All base metals rose around 1%.

Traders also liked the earnings result from Yahoo, released in the previous after-market, and its shares rose 6.3%. Intel’s (Dow) earnings weren’t bad either, and it rose 0.6%.

Mining was also in focus with regard the US industrial production numbers. Production rose 0.7% in March, beating expectations of 0.5%. February’s result was revised up to 1.2% from an initial 0.7%. These results seem at odds with the expectation that February was weak due to heavy snow and March offered up a recovery. But it makes sense. Aside from mining output increasing 9.6% in the March quarter (I suppose it doesn’t snow much a mile underground), utilities output jumped 17.9% as everyone tried to stay warm.

US housing starts played more to the weather script. They rose 2.8% in March to mark the fastest pace in three months, and clearly it’s difficult to build a house on ground under six feet of snow. Economists were nevertheless looking for a bit more.

As half the country sat under a blanket of snow, only eight of the twelve Fed regions were able to report expanding economic activity from late January to early March (the Fed operates on six-weekly periods). From early March to mid-April, that number has risen to ten, according to the Fed’s Beige Book.

But the real Fed impact in last night’s session came later in the day. Fed chair Janet Yellen made a speech to the Economic Club of New York and said, in not so many words, “Granny Yellen would never let you lose money darling”.

Yellen suggested that full employment and stable prices are “tantalisingly” on the horizon. While not specifically referring to when the Fed might rate rates, she suggested this employment/prices goal could be reached by end-2016. Why two years plus is a tantalising horizon is debatable, but it’s a big change from the “six months from the end of tapering” call Yellen made earlier this year, and has regretted ever since, that suggested the first interest rate rise would be around mid-2015.

To commentators, this new guidance is about as dovish as it could be. Furthermore, and most disturbingly, Yellen suggested the Fed’s new forward guidance can serve as an “automatic stabiliser” that helps investors from overreacting to the “twists and turns” the economy may take. In reality, this is just a verbal confirmation of the longstanding “Bernanke Put”, but I don’t think I’d want to be America’s biggest creditor – China – looking on at a central bank that is prepared to manipulate capital markets to whatever degree it takes to make sure Americans don’t suffer, and admit it.

Wall Street loved it. Or at least, the funny money junkies on Wall Street loved it. Plenty of others are incredulous, and in between are those who simply say that rightly or wrongly, “you can’t fight the Fed”. Hence stock prices must go up. At least until the Ponzi scheme is revealed for what it is.

For others, the truth lies in earnings. Recent volatility on Wall Street has provided cause to step aside and wait for the earnings picture to emerge and offer a more realistic gauge of US economic performance. After the bell last night, IBM (Dow) reported in line and its shares have fallen 4%, while Google posted a miss and its shares are down 2.8%.

The other issue hanging over US stock markets is the question of why US bond yields remain so low (and why the yield curve is flattening) and the US dollar stagnant. Both should be rising (and the curve should be steepening) on economic recovery-driven tapering. The bond market is not yet sold on a US recovery. The ten-year yield was little moved a 2.64% last night and the US dollar index remained steady at 79.83.

Gold was also steady at US$1302.50/oz and the Aussie is 0.1% higher at US$0.9370 after the so-so Chinese data release.

Spot iron ore fell US90c to US$116.20/t. The oils were little moved, with Brent at US$109.56/bbl and West Texas at US$103.82/bbl.

The SPI Overnight rose 17 points or 0.3%.

Today the local market sees March quarter production reports from Santos ((STO)), Woodside Petroleum ((WPL)) and Mt Gibson Iron ((MGX)). NAB will provide a quarterly summary of business confidence. By lunchtime there’ll be tumbleweeds rolling down Bridge Street.

Rudi will appear on Sky Business' Lunch Money at noon and later again on Switzer TV 7-8pm.

Have a happy and safe Easter.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms