The Overnight Report: Scotland The Not So Brave?

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By Greg Peel

The Dow closed up 54 points or 0.3% while the S&P gained 0.4% to 1995 as the Nasdaq rebounded 0.8%.

Back to widespread selling on Bridge Street yesterday, in line with Wall Street, as the market contemplates the impact of a possible change in tone from the Fed next week. Any narrowing of the US-Australia interest rate differential will impact upon the value of yield stocks to offshore investors. Supporting this fear is yet another decent fall in the Aussie, by 0.6% to US$0.9150, most of which occurred, this time, in the local session.

That fall was aided by yesterday’s Westpac consumer confidence report. We recall that consumer confidence plunged in June on budget fear but grafted back somewhat over July and August as it became clear little of the drastic budget measures would pass into legislation. Well last month confidence plunged once more, by 4.6% to 94.0, with economists pointing to July’s 6.4% unemployment rate as a likely cause.

It is possible we’ll see that rate corrected today but in the meantime, confidence has been sub-100 (ie pessimistic) for seven consecutive months now. We have reached one year out from the Abbott election win which saw a spike in confidence, and have since fallen 15.1%. Confidence with respect the Australian economy over the next twelve months is down 20.7% in that time and with regard the economy over five years is down 28.6%.

Given Westpac surveys Average Joes we might consider that on top of rising unemployment, the nightly news has recently been highlighting plunging iron ore prices, heightened terrorism alerts, Cold War fears, the inability to afford a house and the inability of the RBA to cut interest rates. And economists wonder why we’re not all wearing rose-tinted glasses.

Consumer stocks were thumped yesterday as one would expect, along with materials of course, and the yield stocks all saw weakness.

Wall Street saw further selling early in the session but once again this was attributed to Europe. As soon as Europe closed the buyers came in and there were two drivers which managed to offset the prevailing Fed rate rise fear.

One was Apple, which regained all ground lost in the previous session as investors warmed to the company’s announced suite of new products. Yes of course the world will want phones that won’t fit in your pocket and watches that only children can actually read. And this thing called “cash” clearly has a death warrant out on it. Apple shares rose 3%, and I think I’m right in saying it’s back to being the biggest stock on the US market given Exxon has suffered from a 15% fall in oil prices from their recent peak.

The other news was the most recent poll from Scotland, suggesting the loyalists have edged ahead of the nationalists with regard next weekend’s independence vote. Maybe it was the St Andrews Cross flying over Number 10 that did it. Or maybe all the talk of what potential disasters might follow with regard both economies now has Scots feeling the low road may be the better option after all.

Perhaps the most interesting development of the day relates to the US bond market, where an auction of ten-years didn’t exactly have them queued up down the street. For the last six months bidders have offered to buy 2.77x the issue, but last night it was only 2.71x. On average, US bidders take out 18.8% of auction but last night they only wanted 13.5%. Foreigners made up the balance. The auction settled at a yield of 2.535%, which is where the market closed for the day, up 3 basis points.

A week from now we’ll know whether all the speculation of a shift to data-driven Fed policy is founded. In the meantime it will be discussed ad nauseum.

I’ve noted before that the gold market often sits there like a wood duck when all around are moving on the latest monetary speculation (in Tuesday night’s case, the suggestion of “considerable time” being dropped) and then reacts the next day. Last night gold fell US$7.00 to US$1249.00/oz, which is probably what it should have done a day ago. The US dollar index was up slightly to 84.22.

There are a lot of concerned faces around the table at OPEC. The organisation last night cut its 2015-16 demand forecasts for its own oil – not because of lower forecast global demand but because of increasing North American supply. OPEC has thus cut its production quota next year to a level last seen in the height of the GFC fall-out in 2009, after oil prices collapsed from their highs.

The announcement didn’t do much good – Brent fell another US$1.09 to US$98.07/bbl last night and West Texas fell US$1.05 to US$91.70/bbl. Maybe the oil markets are taking note of OPEC members’ propensity to solemnly agree to curtail production and then to completely ignore the quota.

After their big falls on Tuesday night, base metal prices stabilised last night, posting only small moves.

Hang onto your hats in the junior iron ore space today. Iron ore is down another US$1.00 to US$82.20/t.

The Australian market is clearly struggling to settle on a direction this week. The SPI Overnight is up 18 points or 0.3%. Brokers, at least, will be somewhat cheered by a lit bit of volatility.

The local August jobs number is out today and economists are expecting at least a retreat to 6.3% unemployment after July’s shock blip. Given the seeming randomness of the survey, it’s likely no one would be surprised if it fell to 5.9%.

There are a few more ex-divs today but just when you thought we were over results season, Myer ((MYR)) and Sigma Pharmaceutical ((SIP)) will report today. Arrium ((ARI)) will hold an investor day that is unlikely to include champagne.

Rudi will not make his usual appearance on Sky Business' Lunch Money.
 

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