The Overnight Report: Sanction Uncertainty

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By Greg Peel

The Dow closed down 48 points or 0.3% while the S&P lost 0.2% to 1973 and the Nasdaq fell 0.2%.

It was a cautious day on Bridge Street yesterday as the market contemplated the global reaction to obstruction by Russian separatists at the Ukraine crash site and the failure of Vladimir Putin to take some control. While it is yet to be confirmed it was the separatists that fired the fatal rocket, guilt by obstruction has widely been assumed.

The Australian market did not need to respond yesterday to the rebound on Wall Street on Friday night, having not fallen in line with Wall Street on Friday. Only the consumer discretionary sector saw a gain of any note, likely reflecting the need for fund managers to rebalance exposures ahead of the exit of David Jones.

Developments over the weekend  ensured caution was required, but as it became more clear that activity at the crash site was “shambolic”, as the prime minister put it, and that Putin was failing to match cooperative talk with action, it seemed much harsher sanctions against Russia would be the result.

It is such sanctions, and not the fighting in the Ukraine nor even the escalated war in Gaza, that have implications for global financial markets and particularly commodity markets. Fearing the scale of potential sanctions, Wall Street fell sharply on the open last night, sending the Dow down 125 points.

It was then that President Obama held a press conference and informed the world that, firstly, John Kerry and Ban Ki Moon were in Israel to broker a ceasefire and, importantly for markets, that the Malaysian prime minister had successfully negotiated with the separatist leader to hand over the black boxes and arrange the transport of the bodies to the Netherlands. No additional sanctions were thus mentioned, hence Wall Street rebounded.

It was not a totally convincing rebound, as the story has not fully played out as yet. And at the moment, geopolitical crises are weighing over economic data and corporate earnings releases in the US.

Last night’s releases nevertheless included the Chicago Fed national activity index, which fell in June to 0.13 from May’s 0.28. Earnings results were again mixed, with toymaker Hasbro disappointing and its shares losing 2.7% despite a revenue beat, and after the bell, Netflix coming in roughly in line but beating on subscriber numbers for around a 1% after-market gain, and Mexican fast food purveyor Chipotle surging 10% on a beat all round.

The US dollar index was typically steady last night at 80.56 and gold was as good as steady at US$1312.30/oz. The US ten-year yield is down another basis point to 2.47% but did fall as low as 2.44% early in the session. The Aussie is down 0.2% at US$0.9374. The real action last night was in commodity markets.

Energy is clearly the main focus of any further sanctions against Russia, as Putin could switch off the gas pipelines to Europe as a tit for tat. Brent crude rose US52c to US$107.76/bbl last night and West Texas jumped US$1.69 to US$104.67/bbl, although the August contract expires tonight and that played a part.

Base metals were looking soggy on Friday night as LME traders worried over Chinese debt defaults, a restart of some Indonesian nickel exports and the general overlay of a seasonal slowdown but short-covering was the order of the session last night as traders contemplated the potential breadth of sanctions against Russia and resultant price impact, were they to be imposed. Aluminium and zinc jumped 2%, nickel rebounded 1% and copper 0.5%, the latter scraping back over the psychological US$7000/t mark.

Spot iron ore, on the other hand, fell another US60c to US$96.00/t.

The SPI Overnight closed up 4 points, suggesting today might be another for which waiting and watching with caution is the prescription.

Tonight sees US inflation numbers which is a hot topic on Wall Street at present, while existing home sales, the FHFA house price index and Richmond Fed manufacturing index are also due.

The RBA governor will speak at a luncheon today but as to whether he is likely to say anything earth-shattering in the context is debatable. Meanwhile, Oil Search ((OSH)) and Mincor ((MCR)) will report quarterly production and Macquarie Atlas Roads ((MQA)) will provide a quarterly update.

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