The Overnight Report: Old Average, New High

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By Greg Peel

The Dow closed up 45 points or 0.3% while the S&P gained 0.3% to 1883 and the Nasdaq rose 0.2%.

Bridge Street has wandered into some post-holiday volatility as volumes pick up again and traders try to figure out where best to be positioned as the ASX 200 fumbles around at its post-GFC high. The index fluctuated yesterday between up 20 and down 20 before closing flat.

Banks have suddenly been seen to be wearing no clothes, or perhaps just their skimpies, as brokers cry overvaluation ahead of coming earnings results. Sluggish Colesworth sales growth has also taken the gloss off the popular supermarkets as share prices go down, down. The new game in town is watching intraday movements in the Shanghai iron ore futures but despite the materials sector finding some support yesterday, this morning’s read of a US$2.90 fall in the spot price will have miners concerned.

So where is the money going? Well if you sell out of your high-yield banks, one place to recover that yield is in Telstra ((TLS)), which was up over 1% yesterday. Utilities, similarly, have found renewed support, while healthcare continues to reign supreme. Here we are at post-GFC highs, and the market is switching out of “risk-on” cyclicals and into yield plays and “defensives”. This suggests little faith in 5500 being smashed and 5600 being targeted. Guess what? It’s May today.

One thing we don’t have in Australia is a central bank pouring free money into the market. Across the Pacific, that free money has now seen the Dow Jones Industrial Average establish a new all-time high for the first time in 2014. The Dow is more symbolic than useful, but the fact the S&P 500 still needs another 0.75% to reach its own all-time high highlights the recent switch out of momentum names and high-tech ephemera and into solid and reliable blue chips.

In the December quarter past, the US economy was growing at an annualised rate of 2.6%. Given the harsh winter that followed, expectations were for that rate to fall to 1.0% in the March quarter. Looks like they got the digits around the wrong way. The US economy grew in the March quarter at an annual rate of 0.1%.

But hey – the March quarter is so yesterday. We knew the snow would have an impact and clearly it has. This is only the first estimate, which means the January numbers have been crunched and then extrapolated across three months. January saw the greatest weather disruption. Next month we’ll see the February numbers added to the mix and in June we’ll see the March numbers complete the picture, by which time the June quarter will be almost over.

And the June quarter, one month in, is playing to the script so far on rebound expectations. Last night’s ADP report showed 220,000 new jobs added in the private sector in April, up from 209,000 in March and ahead of 210,000 forecasts. In the three months to April the private sector has added jobs at an average 207,000 per month compared to 167,000 a year ago. April’s result was the best in five months.

The Chicago Fed region was one of the hardest hit during the winter, to the point the Great Lakes actually froze over. Last night’s Chicago PMI showed a rebound to 63.0 this month from 55.9 in March, which was then the lowest reading since last August.

It’s no wonder last night’s Fed statement noted a recent pick-up in economic activity, which was the only change from the last statement. There was no change to either the tapering timetable or interest rate guidance.

The Fed is having an easier time of it than the ECB at present. Last night’s flash estimate of the eurozone’s April CPI growth came in at 0.7% — above March’s 0.5% but below expectations of 0.8%. It’s a bit of a no man’s land result, given slight improvement should keep the ECB on the sidelines once more but general weakness, indeed seven straight months of sub 1% inflation, will continue to concern the central bank.

Like the Bank of Japan, the ECB is targeting 2% inflation. Yesterday the BoJ lowered its JFY15 (April-March) GDP forecast for Japan to 1.1% from an earlier 1.4%, citing tepid growth and the impact of the government’s new sales tax. The inflation forecast was unchanged at 1.3%. Yet the central bank held off on pumping more stimulus into the economy. As the Fed tapers, it seems the ECB, BoJ, and for that matter the People’s Bank of China, are all reluctant to go further down the cheap money path. The Bank of England held off for months back in 2012 when all and sundry expected increased QE, and now the UK economy is growing at over 3%.

Which brings us back to the apparently rebounding US economy. The stock market clearly shrugged off the weak GDP result last night, dismissing old news. The Dow closed at 16,580, exceeding last year’s previous all-time high of 16,576. Earnings results continue to be mixed but more positive than negative. Last night saw Twitter fall 9% and eBay fall 5% as had been established in Tuesday’s after-market. But big health insurer WellPoint rose 5.6% and Time Warner cited the success of The Lego Movie as providing solid profit gains as its share rose 2.7%.

C’mon Aussie. (The Lego Movie was conceived and created by us lot.)

But it is only in the US stock market where any confidence in the US economy is being exhibited. The weak GDP result otherwise sent the US dollar index down 0.4% to 79.52 and the US ten-year bond yield down 5 basis points to 2.65%. The stubbornly low benchmark yield in the face of Fed tapering, and the severe (almost historic) flattening of the US yield curve suggests those outside of the stock market (known as the “smart money”) have no faith in a strong US economy in the medium term. The stock market is merely on a Fed sugar high.

The weak dollar sent the Aussie up 0.2% to US$0.9289, while gold slipped a little lower on the Fed statement by US$4.20 to US$1291.70/oz.

The LME closed ahead of the Fed statement release last night but in time to catch the weak US GDP number. China begins a four-day long weekend today and the UK is closed on Monday, so it made sense to metal traders to square up last night. Copper took a 1.3% hit and all metals were lower, except for the hero of the hour. Nickel rose 0.6%.

Spot iron ore, as suggested earlier, fell US$2.90 to US$105.40/t. Is it just a holiday thing?

Oil markets have breathed a sigh of relief, for now, that the latest round of sanctions against Russia have not included any energy market restrictions. Brent fell US74c last night to US$108.12/bbl while yet another weekly increase in US inventories saw West Texas falling through the magic 100, down US$1.54 to US$99.74/bbl.

The SPI Overnight rose 17 points or 0.3%.

It’s PMI day today across the globe, beginning with Australia, then the number actually important to Australia, being China’s, followed by the UK and US. Europe is closed tonight for May Day.

ANZ Bank ((ANZ)) will kick off a very highly anticipated bank earnings season today, while Mirvac ((MGR)) will provide a quarterly update.

Rudi will appear on Sky Business today at noon.
 

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