The Overnight Report: Buy? Sell? Surrender?

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By Greg Peel

The Dow closed down 31 points or 0.2% while the S&P was flat at 1970 and the Nasdaq gained 0.5%.

So who came thundering over the hill on Bridge Street yesterday, waving a market-buy portfolio? The Russians, looking for somewhere to invest? Everything from the opening bell said “quiet to down”, with fresh sanctions against Russia causing concern on Wall Street, last night’s US GDP result and Fed statement dictating a move to the sideline, and even the local results season, which begins to build next week, suggesting reason to hold back for now.

But instead we jumped 0.6%, with every sector contributing, marking another new high and conquering 5600 in one fell swoop, all against the run of play. Some large fund, somewhere, most likely in foreign climes, noted Australia’s break-out into new territory and decided to increase their portfolio weighting by 0.1% or so, presumably.

They started buying on Wall Street last night, then they sold it, then they bought it again before finally selling. The Dow opened up 70 points, was down 90 points at midday, slightly positive just after 2pm and down 30 by the bell.

Before the opening bell, the GDP result was released. The late mail had consensus tipping 3.2%. The result of 4.0% was thus a positive shock, as was the revision of the March quarter result back to negative 2.1% from negative 2.9%.

So let’s recap. The first estimate of March GDP came in at 0.1%, the first revision at 1.0%, the second revision at minus 2.9%, and now another revision to minus 2.1%. What will the June quarter result look like in three months’ time? Place your bets.

At best we can say that the 4.0% estimate is a relief, for now. But presumably this strong result implies a Fed rate hike sooner rather than later? Perhaps that’s not such good news. There was panic in the US bond market. The US ten-year yield leapt 9 basis points to 2.55% and the yield curve actually rose slightly, although it still looks a lot more like Holland than Nepal. Stocks were not bought up from the open — prices merely adjusted higher — and then the selling began.

Was it fear of accelerated Fed tightening? Talk on the floor was of concern over Russia and increased sanctions that drove the cautiousness. This may be the case but corroborates neither with the bounce in bond yields nor a US$3.40 fall in the gold price to US$1295.20/oz. Perhaps both were in play as the Dow turned around 160 points, but with the Fed statement due out after 2pm, the market squared up again.

As it was, the Fed statement was more dovish than hawkish, belying any implications of the 4% GDP read. The Fed acknowledged that inflation was likely to move closer to the 2% target than further away, and acknowledged strength in the jobs numbers in recent months. But a new consideration was also tendered, that of labour market “slack”. Here the Fed is referencing the reality of the unemployment data. The official rate may be 6.1% but participation is historically low, and the “true” unemployment rate, including those who have given up trying, is around 12%.

Until this number diminishes the US economy still needs help, so while tapering is on track to being completed in October, the first rate rise is still a “considerable time” away.

In other words, no change. So it was “as you were” for the rest of the session, with selling resuming. This suggests the Russian sanctions really are providing Wall Street with a deal of worry.

On the subject of jobs, the ADP private sector number for July came out at 218,000, down from June’s 281,000 and below a consensus forecast of 235,000. As to whether this had any impact on the day’s ups and downs is difficult to determine.

In the parallel universe that is the Nasdaq, a 20% jump in Twitter shares on its shock earnings “beat” floated all social media boats. Janet Yellen would have been caught well short.

If Russia is the problem, then that should manifest itself in oil price strength, one might assume. Yet last night Brent fell US$1.50 to US$106.04/bbl and West Texas fell US$1.42 to US$99.54/bbl. Why is this?

Two reasons. Firstly, ever since the airliner crash the world has been fearing a step-up in sanctions against Russia that would impact on global energy supply. When it was known the EU was going to start getting tough, this fear became more real. So when Obama announced sanctions only on energy “goods and technologies”, and highlighted their longer term rather than shorter term impact, energy markets were relieved.

Secondly, even if Russia stops selling energy to Europe, it can simply sell it elsewhere and prevent a loss of revenue. Russia has crude coming out of its ears, and its two biggest customers are Germany (1) and China (2). What are the chances of China saying “no, we won’t increase our crude exports at your attractive offer price because you are invading Ukraine”? I’d say, roughly, nil. Russia can always sell its crude, so there is no point in Western oil prices rising.

When it came to trading on the LME last night, the only talk was of  the US GDP. All base metal prices bar tin rose 1-2% before closing ahead of the Fed statement.

Iron ore rose US60c to US$95.90/t.

The good news for Australia with regard the US economy is that the US dollar index is continuing to tick up, by 0.2% last night to 81.40, and that the GDP release sparked a sell-off in the Aussie of 0.6% to US$0.9330.

The SPI Overnight rose 2 points.

Tonight’s centre of attention will be the flash estimate of eurozone July CPI and June unemployment numbers, which will impact on ECB policy consideration.

Locally, building approval and private sector credit data are due.

On the local stock front, a late run of resource sector production reports sees numbers from Bandanna Energy ((BND)), Infigen Energy ((IFN)), Origin Energy ((ORG)), Roc Oil ((ROC)), Lynas Corp ((LYC)) and St Barbara ((SBM)). Energy Resources of Australia ((ERA)) will release its interim profit result.

Rudi will appear on Sky Business at noon.
 

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