The Overnight Report: All Is Forgiven

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By Greg Peel

The Dow closed up 274 points or 1.6% while the S&P gained 1.8% to 1968 and the Nasdaq added 1.9%.

It was no surprise the ASX200 tanked from the bell yesterday, falling 75 points on the opening rotation. It was no surprise this level was seen as a buying opportunity by the domestic bargain hunters. What was interesting is that yesterday’s low was within a point of Tuesday’s low. We can only assume there is a big buy order in the market which is triggered at this ASX200 level.

As to whose, well, let’s move on.

The ASX200 finished down 42 points and, as was the case on Tuesday, last night’s move on Wall Street will no doubt render that redundant yet again. The SPI Overnight closed up 57 points. This volatility is beginning to seem a tad ridiculous, but then it is October. Perhaps we all just go a little mad under a blood-red moon.

No one is paying much attention to monthly economic data at present but for the record, HSBC’s Chinese service sector PMI showed a fall to 53.5 in September from its 17-month high of 54.1 in August.

Europe remained in selling mode last night following on from big falls on Tuesday night, triggered by a 4.0% fall in German industrial production and IMF global growth downgrades. The German and French stock markets were both down another 1% last night and it would seem European markets are losing faith in the ECB.

This time the selling did not carry across the Atlantic nevertheless, given Tuesday night’s big fall on Wall Street and the pending 2pm release of the minutes of the last Fed meeting. The indices traded sideways up to that point and then on the release of the minutes, the Dow rallied 274 points, wiping out Tuesday night’s 272 point fall and marking the biggest session gain in 2014. And it all happened in two hours.

Yes, madness all round. But last night’s minutes rather put paid to the fears that were welling up on Wall Street on Tuesday night. On Tuesday night the IMF released its global downgrade, signalling out weakness in Europe, Japan and emerging markets. Not in the US, where a recovery is underway. Given anticipation of a Fed rate rise as soon, perhaps, as March, the implication was that the US dollar could only continue to move higher. And that is not good for US exporters. Indeed, weakness in the rest of the world has the power to derail the US economic recovery.

Which has not gone unnoticed by the Fed. Indeed, the minutes of the last Fed meeting surprised economists in its acknowledgement of just that – weakness in Europe and Japan, the strong greenback, and the negative implications thereof. It is the Federal Reserve’s mandate to control domestic inflation and economic growth, not to be concerned with the rest of the world as reflected in exchange rates. The FOMC members were also concerned that while removing the “considerable time” clause from low interest rate considerations made sense given the recovering economy, its removal would also lead the market to “misinterpret” such a change as a “policy shift”.

So they left it in. One wonders, therefore, how the Fed can ever shift its policy in response to a recovery if every time the FOMC contemplates such a move, it baulks on fear of upsetting a poor little defenceless market unable to fend for itself.

Whatever the case, Wall Street is back to assuming there will be no Fed rate rise until at least mid next year, and maybe not even then. Or ever. So we can put that issue to bed and get on with it.

Outside of stocks, other markets moved accordingly. The US ten-year bond yield fell another 2 basis points to 2.33%. The US dollar index fell 0.5% to 85.24. Gold rallied US$9.10 to US$1219.20, and the Aussie is up 0.4% to US$0.8845.

The weaker greenback would, under normal circumstances, be a positive for commodity prices. But China came back on board yesterday after its week-long break and sold base metals on the LME, with volumes returning to normal. Aluminium, copper, lead and tin all fell close to 1% and nickel dropped 3%.

Iron ore fell US20c to US$79.80/t.

It was weekly US inventory night on Nymex and the numbers came in at a higher level than expected, so West Texas fell yet again, by US$1.17 to US$87.66/bbl and Brent fell US32c in sympathy to US$91.59/bbl.

As noted, the SPI Overnight closed up 57 points or 1.1%.

This morning the Australian Bureau of Statistics will pull out the big square of chipboard it keeps in the storeroom and set it up on a desk. Juniors will pin yellow post-it notes, upon which are written various percentages in a range from 5.0% to 6.9%, to the board in a random distribution. The tea lady will then be blindfolded and handed a dart, which she will throw at the board.

The ABS will then announce Australia’s official unemployment rate for September.

Bank of Queensland ((BOQ)) will report its full-year earnings today.

Rudi will appear on Sky Business at noon.
 

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