The Overnight Report: Putin On A Smile

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By Greg Peel

The Dow closed up 61 points or 0.4% while the S&P gained 0.4% to 1955 and the Nasdaq rose 0.5%.

It was a solid day on Bridge Street yesterday on decent volume, supported by a positive lead on Wall Street but driven, encouragingly, by local earnings reports. Mind you, take out mega-caps Telstra ((TLS)) and CSL ((CSL)) – the latter enjoying its second session of result-driven strength – and things look a little more mixed, particularly for the miners.

As the ASX200 sets its sights on 5600 once more, we might reflect that the index has traded in a range of just under 5400 to just over 5600 for six months now.

The eurozone’s GDP grew by 0.0% in the June quarter from the March quarter, which saw a rise of 0.2%, missing forecasts of 0.1% growth. Germany’s GDP fell 0.2%, France posted 0.0% and Italy had already posted a 0.2% fall. Spain and The Netherlands were two of the larger economies holding the fort.

The European economy is dead in the water as individual nations battle with forced austerity and high unemployment, as well as the impact of Russian sanctions. But few were shocked by the GDP result, to the point the euro remained steady against the greenback, the German DAX index rose 0.3% and the German ten-year yield remained steady at 1.02%. The weak GDP merely reinforces the belief the ECB will shortly act, probably in the form of some kind of “unconventional” QE-style strategy, given Mario Draghi has pledged to do whatever it takes.

Two questions that have been constantly asked these past several months are “Why are US bond yields stubbornly low?” and “Why is the Aussie stubbornly high?”. Well let’s put it this way. The two strongest developed market economies at present are those of the US and UK, the ten-year bonds of which are both currently trading at a seemingly inexplicable 2.4% yield. But the global ten-year yield scorecard is Germany 1.0%, France 1.4%, Italy 2.6%, Spain 2.5%, Austria, Belgium, the Netherlands and Finland all around 1.2%, Switzerland 0.5%, Japan 0.5%, Canada 2.0% and…drum roll…Australia 3.4%. We’re on a par with Portugal.

Where would you go for yield? Aussie bonds aside, I know a telco providing a decent return. And some banks. And a gas producer, and even a couple of rock diggers, if you’re patient. Those who persist in calling the Aussie a “commodity currency” are still using MySpace.

Let’s take last night for example. Aluminium fell 1.8%, copper 0.8%, iron ore was unchanged last night but has been wallowing again, and Brent crude fell 2% (Australian LNG exports are benchmarked to Brent). The Aussie is up 0.2%.

The big news last night was a seemingly casual visit by Mr Putin to Yalta in Crimea, which is itself in either Ukraine or Russia depending on who you ask. Putin surprised the world by suggesting he doesn’t want a confrontation with the West, and that Russia will do everything in its power to halt the conflict in eastern Ukraine. All that was missing was any suggestion from Putin as to how, exactly, this might be achieved.

The two most obvious responses to this news were the Wall Street rally and the aforementioned big drop in oil prices. Brent fell US$2.10 to US$102.01/bbl and West Texas fell US$1.85 to US$95.48/bbl. But while it’s safer to act first and ask questions later, the lingering question is quite simply, can Putin be believed? The Crimea visit was not broadcast on Russian TV, which the president to date has reserved for his very public and visceral rants against the West. One message for his “electorate”, and another for the rest of the world. I think someone once called that “doublespeak”.

European markets were closing just as this news came through, which means we may yet see a more positive response in the likes of the German stock market tonight. Ditto the base metal markets, in which prices were all weaker last night.

And just as the Wall Street session was about to close, news came through that the Iraqi prime minister had bowed to pressure and agreed to step aside. This paves the way for the creation of a new, inclusive government in Iraq, rather than a Shia sectarian government, which is the first small step towards dealing with the ISIL Sunnis.

The news from Iraq gave Wall Street a little kicker at the death. The US ten-year bond yield fell one basis point to reach a 2014 closing low of 2.40%. Gold slumbered its way through a US$2.30 rise to US$1311.20/oz, despite a supposed easing of geopolitical tension, and the US dollar index is steady at 81.58.

The Aussie, as noted, is up 0.2% to US$0.9320. Iron ore is unchanged at US$93.20/t.

The SPI Overnight closed up 23 points or 0.4%. 5600 here we come, again.

Tonight sees US industrial production, consumer sentiment and wholesale inflation numbers, along with the Empire State manufacturing index, all of which provides potential fodder for the “lower for longer” theme.

It’s a quieter day today on the local earnings front, before all hell breaks loose over the next two weeks. Automotive Holdings ((AHE)) will report, as will James Hardie ((JHX)) ahead of its AGM, while ANZ Bank ((ANZ)) will provide a quarterly update.

Rudi will appear on Sky Business today, Your Money, Your Call – Bonds versus Equities, 7-8pm.
 

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