The Overnight Report: Wanna Get High?

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By Greg Peel

The Dow closed up 77 points or 0.5% while the S&P gained 0.4% to 1981 and the Nasdaq added 0.2%.

As idle as a painted ship upon a painted ocean. So said Samuel Taylor Coleridge in his iconic Rime of the Ancient Trader when describing an ASX200 going nowhere back in 1798. Today’s traders and brokers know how he felt.

Admittedly Wall Street offered little in the way of inspiration on Tuesday night, but the Australian market does appear to have stalled here just over the 5500 mark for now, awaiting direction. Can we stall all the way to result season? Yesterday’s production reports from a couple of big mining names and marginally positive data out of China helped the materials sector to a 0.8% gain yesterday, which was the only sector move of any significance.

China’s GDP grew by 7.5% in the June quarter, exceeding consensus expectation of 7.4% and exceeding the March quarter’s 7.4% growth. Despite many economists revising down their 2014 China growth forecasts earlier this year, GDP is currently running smack on Beijing’s target. What are the odds?

In the month of June, Chinese industrial production rose 9.2% year on year, up from 8.8% in May and exceeding 9.0% expectation. Retail sales rose 12.4% as expected, down from 12.5% in May. Fixed asset investment rose 17.3% in the six months to June, up from 17.2% in the five months to May, exceeding 17.2% expectation.

Economists are now reconsidering their year-end China growth targets, conceding that Beijing’s targeted stimulus policy must be given its due. “Pro-growth fiscal policies, improving external demand, and selective reserve requirement ratio cuts to about 40% of the banking system have played some roles in stabilising the economy,” said Lui Li-Gang, ANZ’s chief China economist, yesterday.

ANZ has now revised up its 2014 forecast to 7.5%, matching Beijing’s target, from 7.2% previously. But it’s not all beer and skittles, as Lui warns: “The commodity inventory data suggest that the downside risks still remain, especially in a sluggish property sector. Alongside with the weak property sales and investment, the unsold housing stock has picked up”.

Janet Yellen was back in the hot seat yesterday, this time testifying to a House Committee. And for the second time in her reign she was forced to back-pedal, this time having to qualify her comments to the Senate Committee on Tuesday night that biotech and small cap stock valuations looked “stretched”. Her comments sparked a deal of controversy with regard the role of the central bank.

The Fed does not have a target for equity values, Yellen quickly explained last night, rather the central bank looks to see if valuations are outside historical norms. “In that sense, I am not seeing alarming warning signals,” she insisted. One gets the impression Yellen’s minders dragged her in after Tuesday’s testimony, gave her another smack around the head, then pushed her back out last night with a copy of the party-line spin.

Her qualification had little impact on the markets in question. The Nasdaq struggled to regain 0.2% but the Russell fell another 0.2%, while the Dow pushed on to a new high at 17,138.

The Fed’s anecdotal Beige Book was also released last night, suggesting improvement in economic and labour market conditions across most regions and noting, in a reference to inflation fears, that price pressures were “generally contained”. Growth across all regions was either “modest” or “moderate”.

No I don’t know either.

US housing market sentiment has risen to a six-month high this month. At 53, the index suggests a welcome return to positive sentiment (50+) from June’s 49. Consensus expected a neutral 50 result. Industrial production rose 0.2% in June, following a 0.5% rise in May, missing expectations of 0.3%. But production is up 4.5% year on year and grew 5.5% in the June quarter, so economists are happy.

The US headline producer price index, indicator of wholesale inflation, rose an annualised 1.9% in June. Consensus expected 1.8%. The Fed’s core PPI measure, ex food & energy, rose by 1.8% when 1.7% was expected.

While hardly cause for fear of runaway inflation, the PPI results did manage to stem the slide in the gold price last night. Gold rallied back US$5.20 to US$1298.60/oz, suggesting it might want to do some work around the 1300 mark.

In US corporate news, Intel’s (Dow) after-market “beat” on Tuesday night saw its shares up 9.3% last night, while Yahoo disappointed and its shares fell 5.1%. But the big news last night was all to do with Rupert getting back to what he loves most – heavily debt-financed, ambitious takeover plays.

Time Warner last night announced it had rejected a combination scrip/cash bid from 21^st Century Fox. Fox has a market cap of about US$70bn and Time Warner about US$80bn. Fox would borrow the cash element which represents around 40%. The assumption is Rupert is trying to create a viable rival to the much larger Disney. The other assumption is that Time Warner shareholders would not be overly thrilled with scrip representing 60% of a company that would have gone deeply into debt in a zero interest rate environment to fund the takeover. The rejection did not shock. But TW shares jumped a whopping 17% on the day and Fox shares fell 5%.

Wall Street knows that when Rupert sinks his teeth in he doesn’t let go.

I noted yesterday that the 0.3% jump in the US dollar index on Tuesday night was akin to a “melt-up”, given dollar volatility has been all but zero for quite some time. Well last night the greenback kicked on, rising another 0.2% to 80.54. The rally came despite another surge in the pound, sending it to a near two-year high against the euro. The pound rallied on news UK unemployment fell to a six-year low in May. This should provide more fuel for BoE rate hike expectations, except that wage growth remains sluggish (as is the case across the developed world right now).

Forex traders did not like the Chinese data, most likely the property element, because at 11am yesterday the Aussie plunged 0.40c. It then proceeded to step-jump up again nevertheless and as at this morning is down only 0.1% to US$0.9365.

LME traders largely ignored the Chinese data and were more swept up in currency moves last night, particularly regarding the pound, before trimming most metal prices. Copper fell 1% although aluminium bucked the trend with a slight gain. Iron ore is unchanged at US$98.00/t.

It was weekly inventory day on the Nymex last night and as usual, traders were surprised. A drop in US crude stocks sent West Texas back up US$1.37 to US$101.52/bbl, temporarily killing off expectations of sub-100. Brent rolled over into the new September delivery front month, and it rose US31c to US$107.19/bbl.

The SPI Overnight closed up 10 points or 0.2%.

NAB will release a June quarter summary of local business confidence today while tonight the flash estimate of eurozone July inflation is due – always a fun occasion. Housing starts in the US will be closely watched.

On the local stock front, Woodside Petroleum ((WPL)) and Mt Gibson Iron ((MGX)) will publish their June quarter production reports.

Rudi will appear on Sky Business at noon.
 

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