The Overnight Report: The Great Divide

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By Greg Peel

The Dow rose 154 points or 0.9% while the S&P gained 0.8% to 1998 and the Nasdaq added 1.0%.

Tuesday’s opportunistic rebound on Bridge Street seemed somewhat ill-timed yesterday as familiar selling returned to the local market. However yesterday’s weakness was not the same across-the-board large-cap thumping we’ve been witnessing for the past couple of weeks but more sector-specific, suggesting less influence from foreign sellers.

The banks were signalled out for attention, falling 0.9% as a sector when Telstra-dominated telcos fell only 0.4%, BHP/Rio-dominated materials only 0.4%, while CSL-dominated healthcare was flat. Consumer discretionary (-1.4%) also copped a hiding, despite ongoing support for Kathmandu, as did utilities (-1.4%).

The banks were more of a local story yesterday following the release of the RBA’s Financial Stability Review, in which the central bank again expressed its concern over a housing bubble. Given the RBA is hamstrung by its one-size-fits-all interest rate lever and a tepid underlying economy, it is otherwise cheering on any plans APRA may be considering with regard “macro-prudential controls”, or mortgage restrictions to you and me. Any curb on the banks’ ability to lend freely on high LVR interest-only investment loans, and the like, threatens bank profits at the margin.

Meanwhile, over where those dastardly foreign sellers mostly reside, the housing market is being resoundingly cheered. Sales of single-family homes rose 18% in August to a seasonally adjusted annual rate of 504,000 when economists had expected 426,000.

This data point appeared to be the trigger for a turnaround on Wall Street last night after three days of falls, with the major indices rising the most in five weeks. But there were also Fedheads out and about spouting their opinions, which is always a cause for concern.

The Fed should be “exceptionally patient” before hiking interest rates, said the Chicago Fed president and non-FOMC member, even the point of allowing a modest overshoot of the inflation target. Meanwhile the Cleveland Fed president and voting member suggested the central bank should scrap its “considerable time” guidance on the first rate hike, thus focusing market attention not on the calendar but on actual data flow. However Loretta Mester also noted the Fed is “prudently” planning its exit from accommodative policy.

So one might argue that these comments are net “dovish”, and thus the reason why US stocks rallied last night. But if they were dovish, why did the US ten-year bond yield rebound 3 basis points to 2.57%? Likely because the strong home sales result is exactly the sort of economic data point the Fed is looking at.

The US dollar index surged on sales data, rising 0.4% to 85.04. The Aussie is also nevertheless 0.4% higher at US$0.8883, underscoring my suggestion the foreigners were absent on Bridge Street yesterday. Gold is down US$6.90 to US$1216.90/oz.

The rise in the dollar index was as much about European economic weakness as it was US strength. The German IFO survey of business sentiment has fallen to a 17-month low in September. The IFO survey is highly regarded as an economic bellwether given its close correlation to the ebb and flow of Germany’s GDP growth.

The point was not lost on LME traders but the strong data out of the US overruled. Sales of new homes require housing construction which in turn requires copper, among other things. Copper rose 0.5% last night as did aluminium and tin, while lead, nickel and zinc all rose between one and two percent, all despite the jump in the greenback.

Ring the bells and hang out the bunting! The iron ore price is unchanged at US$79.40/t.

The strong US data was clearly an incentive for West Texas crude to have a run last night, rising US$1.23 to US$92.88/bbl, while Brent rose US24c to US$97.10/bbl.

The SPI Overnight closed up 22 points or 0.4%.

As to how the Australian market responds today is just about anyone’s guess. Were the bargain hunters scared off by yesterday’s fall after Tuesday’s rally? Are the foreign sellers done yet? Can we really say, at present, that Wall Street provides a “lead”? Rising US bond yields suggest less attraction to our local yield plays.

It's stock option expiry day on the ASX today, which may add to the uncertainty, while durable goods data are due in the US tonight.

Brickworks ((BKW)) will report its full-year result.

Rudi will appear on Sky Business at noon.
 

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