Daily Market Reports | Jun 19 2014
By Greg Peel
The Dow rose 98 points or 0.6% while the S&P gained 0.8% to 1956 and the Nasdaq added 0.6%.
It was a different story on Bridge Street yesterday than we’ve seen so far this week. The ASX 200 grafted down yesterday rather than up from a weak close and it was all about the energy sector, down 1.9%, which was all about Woodside Petroleum ((WPL)). Despite the promise of the removal of the Shell stake overhang, the market sold down the sector heavyweight to a level more in line with the discounts institutions and Woodside itself will enjoy on the Shell sale. And in turn the whole sector was dragged down.
It was an isolated domestic adjustment when one considers the bigger picture for oil at present. Last night ISIL attacked the Baiji refinery just north of Baghdad – Iraq’s largest. Two storage tanks were in flames as Iraqi forces fought back. Foreign oil companies are now pulling non-essential personnel out of Iraq and the International Energy Agency has scaled back its Iraqi production forecasts, now assuming only 1.3mbpd of capacity will be added to the country’s existing 3mbpd by 2030, down from an earlier prediction of a 3mbpd addition.
ISIL is still a long way from the bulk of Iraq’s oil infrastructure in the deep south of the country, but last night the price of Brent crude rose US84c to US$114.25/bbl. Meanwhile, the price of abundant West Texas crude fell US64c to US$105.79/bbl, highlighting the new dynamic in the oil spread. Analysts had expected the Brent-WTI spread to close now that pipelines have begun transporting oil out of Cushing, but the uncertain future of Iraq has analysts now predicting a return to spread blow-out as non-US supply is disrupted.
Wall Street’s focus was nevertheless more internal last night, as the Fed released its latest policy statement and Janet Yellen conducted her second press conference.
We recall that at the last conference the Fed chair suggested the timing gap from the end of QE tapering to the first Fed rate rise would be “a considerable time”, and when pushed on what exactly a “considerable time” was, she shocked the market by responding, “six months, something like that”, subsequently sending financial markets into a tail spin. This time, Yellen was not going to be so flippant.
The Fed Chair instead insisted that while unemployment and inflation control were the Fed’s two primary mandates, there was “no mechanical formula” the Fed was applying which would trigger the hike. This means no specific level of headline unemployment and, indeed, not necessarily a specific level of core inflation. The central bank still has an inflation target of 2% but is looking through short term “noise” toward medium term expectations of inflation, which are still contained, and not monthly data, which in May did indeed hit 2%.
Yellen all but admitted knowing when to raise rates was a very difficult call requiring consideration of many factors, in so doing removing some of the deity perception attached to the Fed. But while the FOMC might only be human after all, Wall Street simply saw a central bank that, to quote Mario Draghi, will “do whatever it takes”. Under that scenario, selling stocks would be futile, at least in the shorter term. Thus the S&P 500 last night hit a new record high.
The US bond market cast away the inflation fears suddenly built in following Tuesday night’s surprise CPI result, and the ten-year yield fell back 4 basis points to 2.61%. Perhaps the most telling market move was a fall in the VIX volatility index on the S&P 500 of 12% to 10.6, almost an historical low.
So God’s in his/her heaven and all is right with the world. The only victim is that foundation stone of global financial markets, “price discovery”, given all prices are currently being controlled by the Fed, ECB, BoJ and BoE.
God is clearly not Australian, as last night’s fall in the US dollar index of 0.2% to 80.39 on Fed dovishness has helped push the Aussie up 0.7% to US$0.9402 once more. That, and the “safe haven” status Australia now enjoys in times of geopolitical uncertainty.
LME trading closed before the Fed statement release and press conference so metal prices were mostly steady. The exceptions were aluminium, which responded to the lowest inventory levels in two years by rising 1%, and nickel, which decided last night to fall 3% instead of rise, just to mix things up a bit.
Spot iron ore rose $1.00 to US$90.30/t. Suddenly a ‘9’ looks awfully comforting.
The SPI Overnight rose 16 points or 0.3%.
Keep an eye on the 5400 level for the ASX 200 today, SPI expiry day. The considerable amount of work done by the physical index at this level suggests some major options positions in the balance.
Asciano ((AIO)) will hold an investor day today.
Rudi will appear on Sky Business at noon.
And obviously I can’t leave today without some mention of sport. Yep, Saturday night’s third test against the French in Sydney is bound to be a cracker.
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