The Overnight Report: Sanctions Bite

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By Greg Peel

The Dow closed down 70 points or 0.4% while the S&P lost 0.5% to 1969 and the Nasdaq was flat.

It was another benign session in the local market yesterday beyond a couple of stock-specific factors, yet we still managed to hit a new post-GFC high (just). In days of yore when new highs were struck there’d be plenty of beers to follow at the pub, yet local brokers are currently tearing their hair out in despair at a lack of market interest.

What a strange rally. There are only a handful of large global organisations driving this rally, and they all go under the label of “central bank”. Last night the Spanish ten-year bond traded below the equivalent US bond, yield-wise, implying Spain is a safer and stronger economy. In La-La Land.

It was supposed to be a quiet session on Wall Street last night, being the last before the GDP release and Fed meeting tomorrow night. But traders were excited on the open when the Conference Board’s monthly measure of consumer confidence came in at 90.9, up from 86.4 in June. That’s the highest read for this particular index since October 2007 – the month Wall Street marked its pre-GFC high.

The consumer is everything to the US economy so the Dow jumped 70 points from the bell, taking the average back over 17k once more. The May Case-Shiller house price index held mixed messages, rising 1.1% nominally, falling 0.3% on a seasonally adjusted basis, and marking a 9.3% year on year fall that nevertheless suggests a decline in rate from April’s 10.8%.

But then news came out the US and EU had agreed on a step-up in sanctions against Russia, which the president would outline later in the day. The Dow came back to the flatline and drifted until late in the session when the president finally spoke, announcing a wider spread of financial sanctions against Russian banks and corporations with regard their capacity to raise capital in the West, restrictions on arms trade, and sanctions against the export of energy-related “goods and technologies” to Russia.

The latter is of the most importance, particularly to Europe. It is not the internecine killer blow for energy that has become a lingering fear, which would see Russia shut off its gas exports to Europe and in so doing cripple both economies, but rather an impediment to Russia’s longer term energy development, as the president expressly noted.

As it was, trading in the US energy market session had “closed” by the time the president spoke (it continues electronically) and a US60c fall in West Texas to US$100.96/bbl was all about local supply considerations. Brent, which is Europe’s benchmark oil price, remained steady at US$107.54/bbl. At this stage the sanctions are not a major threat to world energy prices.

But increased sanctions create a more general fear of an accelerating Cold War II – a tag the president dismissed in his post-announcement Q&A. To date Putin has talked cooperation and acted in complete contrast, and the president noted satellite intelligence indicating a build-up of Russian troops and hardware along the Ukraine border even as unarmed international investigators were again forced to withdraw from the crash site on safety fears.

It was enough for Wall Street to retreat on the close, notwithstanding what tonight may bring in the form of the GDP estimate and Fed policy statement, or Friday’s jobs number.

There were some corresponding safe haven moves, with the US dollar index rising 0.3% to 81.22 and the US ten-year bond yield falling 3 basis points to 2.46%, but gold actually fell US$6.10 to US$1298.60/oz and was once again questioned as a modern form of safety trade.

LME traders would have been aware of pending new sanctions but trading closed long before the president’s announcement, hence the focus in London was more on squaring up ahead of tonight’s fun and games in the US. Recent high-flyers aluminium, lead and zinc all copped 2-3% sell-offs and copper 0.8%, with nickel a little steadier after having already endured a correction recently.

Iron ore is steady at US$94.30/t.

Futures traders in the Australian market seemed less concerned than their US counterparts given the SPI Overnight closed down only one point.

So as the Scottish git from the opening ceremony would say, tonight’s the night. International markets will mull over the increased sanctions but anything is possible when the first estimate of US June quarter GDP is released, followed by the latest Fed policy statement. Tonight also sees the ADP private sector jobs number.

In Australia, AWE Ltd ((AWE)) and Panoramic Resources ((PAN)) will deliver production reports while Woolworths ((WOW)) will report June quarter sales and OceanaGold ((OGC)) and debutant Genworth Mortgage Insurance ((GMA)) will release profit results.

Rudi will appear on Sky Business at 5.30pm.
 

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