The Overnight Report: The Yankees Are Coming!

This story features TELSTRA GROUP LIMITED. For more info SHARE ANALYSIS: TLS

By Greg Peel

The Dow closed up 92 points or 0.5% to 17,068. Another millennial mark bites the dust. It was also a new all-time high, as it was for the S&P, up 0.6% to 1985. The Nasdaq rose 0.6%.

Glenn “Super Mario” Stevens gave it a red hot go yesterday in Hobart, knowing full well he can’t cut the cash rate to take the heat out of the currency at the moment so the only way to get the Aussie down is to talk it down. Fear is always the best tool, so Stevens warned that when the Aussie does eventually plummet, and it will, you best not be stuck with any.

And don’t think the RBA doesn’t have the ammunition to achieve that. No sir-ee Bob. If necessary, Glenn will get out his big knife and cut that rate some more. Not worried about house prices.

It was pure theatre, and everyone was thoroughly entertained, agreeing that Stevens bloke sure puts on a great show. But no one told the forex guys it was just that – theatre – so they actually thought it was all real. At 11am yesterday the Aussie free-fell a cent and is now at US$0.9347.

To be fair, Stevens did warn that the strong March quarter GDP will prove misleading, and that Australia’s growth will slow notably from the June quarter. The RBA is worried about progress in the transition away from mining, although not so worried about the budget. The implication is nevertheless that another rate cut cannot be ruled out. We recall that ECB president Mario Draghi talked down and talked down and talked down the euro for about two years, to no avail. Eventually he did have to cut rates. But while Australia offers safe, higher yields than the rest of the developed world, the Aussie ain’t coming down. The only way the Aussie can come down is if the greenback rises.

Speaking of Australia’s non-mining economy, building approvals surged by 9.9% in May, well above 3.2% expectations, to 14.2% annual growth. The swing factor was a 25.5% jump in lumpy apartment block approvals compared to only a 0.6% increase in single dwelling approvals. There is little doubt Australian cities are moving away from the quarter acre mentality and towards the Manhattan model, with 45% of all current residential construction represented by apartments, up from a 30% average ten years ago.

The greater the ratio of apartments, the lesser the positive impact on the construction and building materials sector, given a lower ratio of size and materials per dwelling compared to single dwellings.

And retail sales fell 0.5% in May. The only surprise here was that anyone was surprised – not in the number itself but the fact the ASX consumer discretionary sector rose 0.6% yesterday on the news and was actually one of the best performing sectors on the day. I noted yesterday morning that retailer after retailer after retailer slashed guidance in June, bemoaning the mild autumn. We all knew retail sales would have a Barry in May. Sell the rumour – buy the fact.

Despite the big jump on Wednesday, the ASX 200 kicked on solidly again yesterday as the materials sector led the charge given big jumps in base metal prices overnight. But everyone piled back into Telstra ((TLS)) as well, which says a lot about the “unloved” rally. If we truly are seeing a return to economic strength, why is yield still king?

Because it’s all driven by central bank funny money. How long can it go on?

Last night’s US non-farm payrolls report blew forecasts away with a result of 288,000 jobs added and a fall in the unemployment rate to 6.1% from 6.3%. It’s the lowest rate since that fateful month known as September 2008, and the first time 200,000 plus jobs have been added five months in a row since 1999 (although the population may have somewhat expanded in 15 years).

Talk now is of economists starting to question whether they should bring their first rate rise expectations forward in time in spite of ongoing Fed dovishness. The fear is that confirmation the US economy truly is powering along may cause the dam to break in the bond market, and the subsequent sell-off to spark an equivalent plunge in stocks. But if that really were the case, why would the Dow go up 92 points in a half-session to yet another all-time high last night, smashing through the 17k barrier on its way? And the US ten-year bond yield rise only 2 more basis points to 2.65%?

It’s a tough one, and the question hanging over markets across the world right now. Is good news good or is good news bad? No one knows for sure, until it happens.

For the record, the world released the June round of service sector PMIs last night. The only measure to show a rise was HSBC’s China number, which rose to 52.4 from 50.2. Every other result was negative, although with varying degrees of concern implied. In the loser camp are Australia, with a fall to 47.6 from 49.9, and Japan, with a fall to 49.0 (49.3). In the “negative watch” camp is the eurozone, with a fall to 52.8 (53.2).

The ECB left policy unchanged last night as expected.

In the “numbers are so big a tick down doesn’t really matter” camp are Beijing’s official Chinese measure, showing 55.0 down from 55.5, the UK with 57.7 (58.6) and the US with 56.0 (56.3).

The US dollar did actually manage to rise last night, as it should, by 0.3% on its index to 80.20. Stevens may soon get his wish. Gold fell back US$6.40 to US$1320.10/oz.

Base metals were mixed on small moves, although copper added another 0.5%, while iron ore jumped US$1.80 to US$96.50/t.

The oils had a quiet night, with Brent closing at US$111.07/bbl and West Texas at US$104.21/bbl on little movement.

The SPI Overnight closed up 27 points or 0.5%, so strap in again today. 5500 here we come. It is Friday though, and there’s no Wall Street tonight. Good day to go to lunch? I am.

I’m going to grab me a drum and grab me a fife and sing Yankee Doodle. Happy 7/4 to all our Seppo mates.
 

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