Daily Market Reports | Jul 03 2014
By Greg Peel
The Dow closed up 20 points or 0.1% while the S&P gained one point to 1974 and the Nasdaq was flat.
Well it turns out I was right after all. Just a day late. The big FY15 reversal of late FY14 selling on Bridge Street arrived on the second day rather than the first, aided by a solid jump on Wall Street. Perhaps offshore sellers were still in action here on Tuesday morning.
The two sectors most knocked down in the run-up to year-end were among the leaders to the upside yesterday, being banks and supermarkets, although sector gains were very consistent, including a big jump for materials despite only a slight tick-up in the iron ore price.
It’s all smoke and mirrors of course, all about portfolio positioning and nothing to do with immediate news or data. Maybe from today we can settle back into a regular routine. Yesterday’s May trade balance release surprised to the downside, but yesterday no one cared. Except the forex market.
The RBA suggested on Tuesday Australia’s solid March quarter performance would give way to below-trend growth re-establishing in June and beyond. What we saw in the June quarter was a decoupling of the traditional commodity-currency relationship for Australia, allowing the price of our biggest export commodity to fall while the global search for yield pushed our currency higher. Typically they rise and fall in unison, with the Aussie acting as a dampener both up and down, so when the two move in contradiction the resultant impact is magnified.
After a couple of months of better than expected trade surpluses, economists were expecting a reversal to a small deficit in May of $200m. Instead the deficit was $1.9bn. Exports fell 4.6%, driven by a 9% fall in metals & minerals (mostly iron ore, coal), while imports fell 0.6%, indicative of the winding back of mining construction and subsequent parts and equipment demand. The iron ore/Aussie imbalance was the major factor.
And so it was every forex cowboy who bought the Aussie up to 95 on Tuesday on the solid Chinese PMI numbers sold it back down yesterday on the bigger than expected trade deficit. The Aussie is down 0.6% to US$0.9442.
Over on Wall Street, the mood was mixed from the opening bell after Monday night’s big rally to new highs. The ADP private sector jobs number for June came in at a better than expected 281,000, leading to a few upgrades to expectations for tonight’s non-farm payroll result. The Dow jumped 30 points from the gun, and then someone pointed to the bond screen. The US ten-year yield jumped 7 basis points to 2.63%, which spooked the stock market and suddenly sparked a lot of nervous discussion.
Is the US bond market beginning to concede the US economy is actually rebounding strongly out of the snowbound first quarter? Could a trickle become a flood and the ten-year yield hit 3% in a heartbeat despite dovish rhetoric from the Fed and little expectation of a rate rise anytime soon? If so, how bad would the subsequent stock sell-off be?
Consensus appears to be that were the bond market to panic and selling to snowball then yes, the stock market would also panic temporarily and follow suit. But were the ten-year yield to climb towards 3% in an orderly fashion, the driving force behind that rise, being improving US economic data, would provide sufficient confidence for the stock market to maintain its bullish trend. Stand by tonight, with the early release of the non-farm payrolls number, to determine whether we see Dow 17k conquered or Dow 16k look like the next target. The private sector number has never been a consistently reliable lead indicator.
The other issue concerning Wall Street last night was, once again, the weather. Seems the Yanks just can’t take a trick. With Americans expected to flock to east coast beaches for the Fourth of July long weekend, Tropical Storm Arthur is threatening to turn fireworks into fizzers. For many coastal resorts and businesses, this weekend is Christmas. Imagine if a cyclone hit Bondi during the festive season. And the knock-on effect across the wider economy, including into fuel sales for example if holiday-makers abandon plans, will not be insignificant.
So tonight Wall Street traders will awaken and check the weather map, find out what Mario Draghi said after the ECB policy meeting (no change is expected so soon after the interest rate cuts of June), turn up to work for the jobs number, and then bugger off for the weekend. Markets will close at lunchtime, including the NYSE at 1pm, so even the skeletons get a break.
The US dollar index was up 0.1% last night to 79.93 while gold was steady at US$1326.50/oz. But someone put a bomb under the LME.
Base metals trading has been tied down these last few sessions by impending July option declarations, and their passing last night opened the spigot. Throw in the solid US jobs number and commodity funds began lining up to pile in. Buying fed on itself throughout the session and by 7pm London, the “kerbside” close showed tin up 1%, aluminium and copper up 2%, lead up 2.5% and nickel and zinc up 3%.
Iron ore rose US50c to US$94.70/t.
By contrast, an easing in geopolitical tension saw the oils post solid falls last night, with Brent down US$1.26 to US$110.99/bbl and West Texas down US$1.13 to US$104.25/bbl. It was not about Iraq nor even about Ukraine. It was about Libya, where rebels agreed to allow two oil terminals reopen.
Mind you, Libyan oil terminals have been open, shut, open, shut and open again for some time now, so maybe next week a different band of rebels will move in.
Usually a big move like the 1.5% we saw for the ASX 200 yesterday would imply some settling of the dust in the subsequent session, but the SPI Overnight closed up 20 points or 0.4%, no doubt encouraged by higher metal prices.
The local stock and forex markets will nevertheless be holding their breath for today’s May retail sales release, which is expected to confirm weakness due to the balmy autumn. But given such anticipation in the wake of a string of retailer profit warnings, the number would have to be very bad to foster further selling in the sector. Can’t say the same for the forex cowboys though, cause they’re all nuts.
(Oh hush. I’m allowed to say that because I used to be one in a former life.)
Today we also see May building approvals, and then we have the global round of service sector PMIs, with the two Chinese numbers again the most important. The ECB meets tonight and the US non-farm payroll release follows, and then quite frankly Bridge Street might as well have a long weekend as well.
Rudi will appear on Sky Business at noon. Don’t ask about the soccer or you’ll never shut him up.
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.
