The Overnight Report: Wall Street Gets Its Momo Back

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By Greg Peel

The Dow rose 112 points or 0.7% while the S&P gained 1.0% to 1896 as the Nasdaq surged 1.6%.

Not much was expected of the Australian market yesterday and it delivered, posting a disinterested drop. As we speak, Joe Hockey is in front of the bathroom mirror, razor in hand, absent-mindedly singing Tonight’s the night / It’s gonna be alright and feeling just a little anxious.

As is the rest of the country.

There was never going to be much of a market reaction, under the circumstances, to NAB’s monthly business sentiment survey yesterday although it did somewhat surprise given all the gloomy budget talk. Business confidence going forward actually improved despite a slight dip in perceived current conditions. Capacity utilisation has been improving in recent months and as the ANZ economists note, this is consistent with the apparent peak in unemployment. Retail prices are seeing a little inflation but are contained.

The drop in current conditions came mostly from the mining sector and ANZ puts this down to the 20%+ drop in the iron ore price. Otherwise, conditions have generally eased off from the late 2013/early 2014 pick-up but with confidence improving, the numbers are consistent with an economy quietly transitioning away from reliance on mining investment, suggests ANZ.

It will be interesting to see whether Bridge Street can post another subdued session today, as one might expect ahead of tonight, given outside influences. China provides its monthly economic data dump today and Wall Street posted a very positive session last night. The Aussie, at least, is going nowhere for the moment. It’s steady again at US$0.9361.

We last left Wall Street with the Nasdaq still under some pressure, the Dow at a new all-time high, the S&P 500 splitting the difference, and the Russell 2000 small cap index closing below its 200-day moving average for the first time since September 2012. The Dow-Nasdaq spread has been implicit of a market dumping out of overvalued “momo” stocks (momentum) and switching into conservative “value”, while the rollover in the small caps added to nervousness that the whole house of cards was about to collapse and we might see that allusive pullback we’ve all been expecting for a long time.

But indeed, the opposite has proven true, if last night’s session is any guide. There was no doubt plenty of short covering involved, but the Nasdaq suddenly shot up 1.6% and the Russell soared 2.5%, basically from the opening bell. It seems fund managers had a good think about it over the weekend and decided that valuations in momo and small cap stocks had once again become attractive, assuming the US economy makes good on early indications of a solid spring rebound. While traders did not subsequently send the blue chips into the negative on a reverse-switch, the 0.7% gain for the Dow was modest by comparison and for once allowed the broad market S&P to outperform. The Dow moved further into blue sky but the star on the day was the S&P, which exceeded the previous all-time high of 1890 in closing at 1896.

The not-yet-convincing part of the argument stems from the intra-day high of 1897 only equalling, rather than exceeding, the previous intra-day ATH set in April.

One might suggest Wall Street has decided it couldn’t care less about the Ukraine. Or at least is not particularly worried about any ongoing threat to global trade. Putin backed off the troops as requested and advised against autonomy referenda going ahead, but they went ahead anyway and it would seem a couple more Ukraine states will join Crimea in a Moscow alliance. Perhaps Vlad has decided he can play it cool and rebuild the Soviet Union gradually by stealth.

Gold was up US$6.00 to US$1296.10/oz last night, but as to whether that’s a “geopolitical” move or not is unclear. Most commentators have given up trying figure out gold. The US dollar index was steady at 79.89 but in a sign last night’s rally in US stocks was more than just short-covering, the US ten-year bond yield rose 4 basis points to 2.66%.

Nickel is partying like it’s 2006 and Indonesian nickel miners must be choking on their rendang as they watch everyone else in the world enjoy the spoils. When will the first correction come? Not yet, apparently, as nickel jumped another 5% last night. With a slight delay, LME traders have decided the surprisingly low Chinese inflation number posted on Friday represent a green light for Beijing to pump up the stimulus, so last night copper, lead and zinc jumped 2% and aluminium 1.5%.

Spot iron ore rose US30c to US$103.00/t.

It was left to the oil markets to show at least some trepidation over the uncertainty now created by the weekend’s Ukrainian referenda. Brent rose US45c to US$108.40/bbl and West Texas rose US60c to US$100.59/bbl.

The SPI Overnight closed up 30 points or 0.6%. Under normal circumstances, that is a fair call. But will Bridge Street be that bold ahead of tonight?

Orica ((ORI)) will release its interim result today and we’ll see local monthly housing finance and investment lending data. China will provide industrial production, retail sales and fixed asset investment numbers and tonight sees US retail sales.

But before then, Australia will hold its breath at 7.30pm as Joe rises from his chair.
 

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