The Overnight Report: Volatility Returns

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By Greg Peel

The Dow closed up 87 points or 0.5% while the S&P gained 0.3% to 1869 and the Nasdaq was flat.

“A response of Moscow will follow, and it will be painfully felt in Washington D.C.”

So said Russia’s deputy foreign minister last night, in response to fresh sanctions imposed by the US and Canada. The sanctions are largely an extension of existing asset freezes and visa bans to further members of Putin’s so-called “inner circle”, as well as a ban on exporting high-tech equipment to Russia which might be used for military purposes.

The sanctions are again more symbolic than crippling, and the EU is not in the mix this time. But just when the Russian deputy minister’s remarks were sending shivers, the rumour spread on Wall Street that Russian troops were pulling back from the Ukraine border. There appears to be no clarifying news at this stage.

It was a flat and quiet start to the week on Bridge Street yesterday as holiday-makers returned to work and anticipated the coming action later in the week. But it was no quiet affair on Wall Street, where volatility returned in force. Measured in Dow points, the market swung from up 137 at 10.30am to down 49 at 1.30pm to up 112 at 3.30pm before closing up 87.

March saw US pending home sales post their first gain in nine months, rising 3.4%. Pending home sales are the precursor to existing home sales which have slid steeply in recent months, although most recent weakness has been attributed to the weather. Is this a sign the US housing recovery is coming out of a dip?

Pharma giant Pfizer (Dow) announced a takeover bid for UK peer Astra Zeneca in a move aimed at reducing the company’s overall tax payments by exploiting the lower UK tax rate. Pfizer shares rose 4%. On the flipside, Bank of America (Dow) shares fell 6% after the CEO admitted BofA had inadvertently misquoted its regulatory capital during stress tests because of an incorrect assessment of some convoluted structured notes inherited from Merrill Lynch. BofA was forced to save Merrills in 2009 and five years later is still trying to figure out the mind-bending derivatives it now owns. The Fed has instructed BofA to suspend its planned dividend increase and share buyback.

In earnings news, the half-way mark of the season has now seen forecast S&P 500 quarterly earnings growth swing back to the positive at 1.1%, having recovered from minus 1.2% a week ago.

Aside from the positive US data and M&A news, Wall Street rallied in the morning because it had sold off on Friday ahead of a weekend in which anything might happen in Ukraine. It didn’t, so traders bought it back again from the open. But when markets reached their early highs, the momentum-name sellers returned in force. Down went the Nasdaq, to a nadir of down 1.5%, with the usual high-PE suspects again being trashed.

Nor did it help that news came through that an assassination attempt had been made on the “neutral” mayor of Kharkiv, a large city in Ukraine’s east, while he was jogging. News then followed of the fresh sanctions. Given the sanctions could have been a lot worse, Wall Street likely saw that news as more positive than negative, but then someone said Russia’s troops were pulling back. As noted, there is no news on the wires at this stage.

Whatever the facts, the reality is Wall Street is split between those suggesting the escalating geopolitical crisis is fundamental and the source of last night’s volatility and those declaring any possible outcome, including war, to be irrelevant to US markets. This in itself would explain a lot of the rollercoaster. But the truth is…no one really knows what’s going on. And things are really set to heat up later in the week, Ukraine aside.

The US dollar index is, as always, steady. Having risen on pre-weekend concerns, gold fell US$7.40 last night to US$1296.60/oz. The US ten-year bond yield is up a tick to 2.68%. The US bond market lets the US stock market play the headless chooks. The Aussie is off 0.2% to US$0.9260.

Sanction fears are more palpable for metal markets, hence base metal prices have recently been bouncing around in a range, not unlike the US stock market. Last night prices fell, with copper down 0.4% and nickel down 2%.

Spot iron ore has taken another hit, down US$2.40 to US$108.60/t. China has a four-day long weekend coming up, beginning Thursday.

The threat of potential energy-related sanctions had its impact on West Texas crude last night, but only to the tune of a US30c gain to US$100.90/bbl, while more relevant Brent crude fell US$1.26 to US$108.28/bbl on news two Libyan oil terminals might be about to reopen. Again.

Futures traders seem keen on the local market today, with the SPI Overnight up 20 points or 0.4%. Might be a struggle with iron ore down two bucks.

Tonight the UK will release its first estimate of March quarter GDP while US data releases include house prices and consumer confidence. Prior to that, it will be a busy day on the local corporate front.

Beach Energy ((BPT)), Drillsearch ((DLS)), Independence Group ((IGO)), OceanaGold ((OGC)), PanAust ((PNA)), St Barbara ((SBM)), Whitehaven Coal ((WHC)) and Western Areas ((WSA)) will all provide quarterly production reports. Wesfarmers ((WES)) will release its quarterly retail sales numbers and Asciano ((AIO)) will provide a quarterly update. G8 Education ((GEM)) will hold its AGM.
 

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