The Overnight Report: It Was Just A Flesh Wound

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By Greg Peel

The Dow rose 215 points or 1.3% while the S&P gained 2.0% to 1941 as the Nasdaq surged 2.4%.

The rebound took a breather on Bridge Street yesterday which was possibly a relief to those feeling a little exhausted. A 0.9% gain in the S&P500 on Monday night provided incentive for another strong open for the ASX200, up 25, but there the sellers quickly pounced before the market wobbled towards its first timid close in many sessions. The drift back towards the 5300 level, which had tried to offer support on the way down, suggests some consolidation may be needed now before the next leg, although given last night’s rally on Wall Street, that may begin today.

I have noted recently that data are not playing much of a part right now, given the level of general market volatility and technical shenanigans. Thus we saw only a muted response yesterday from the stock market to first the RBA minutes and then the Chinese numbers.

The minutes contained no surprises. The RBA indirectly acknowledged the ABS’ failure to come up with a viable unemployment reading by noting that the central bank assessed “a range of indicators”, and that they are suggesting a level of slack remains in the labour market which should ensure consistent jobs growth is a way off yet. This will keep a lid on inflation, countering the impact of the lower Aussie, which is still too high anyway. On balance, no change to current policy.

Which was no surprise to anyone, except the forex cowboys of course, who appear to have been predicting a cut. The Aussie jumped from around 87.70 to 88.30 on the release, before drifting back again to await the Chinese data.

Let’s look first at the monthly data for September. Industrial production rose a better than expected 8.0% year on year, up from 6.9% in August, while retail sales held relatively steady at 11.6% growth from August’s 11.9%. Fixed asset investment grew 16.1% year to date to September compared to 16.5% year to date to August.

We recall that China’s July numbers somewhat shocked to the downside, while the August numbers saw a better than expected recovery. Yesterday’s September numbers were also relatively positive, hence we might say that it makes sense China’s September quarter GDP came in at 7.3% growth, beating 7.2% expectations. That’s down from 7.5% in June, which is also Beijing’s 2014 target, but then Beijing has previously indicated that a little under that target would still be okay.

Much has been made of this being the worst result since the March quarter 2009, GFC result of 6.6%. But let us not forget that Beijing pumped in a historically unprecedented level of stimulus at that point, and that in the last couple of years has been trying to carefully cool the property market frenzy that resulted. The Chinese economy is maturing and settling back to a more sustainable level of growth.

The forex cowboys took one look at 7.3% against a 7.2% expectation and pushed the Aussie straight back up to 88.30 again, before it fell straight back down again to where it started. The ref then blew the whistle and the players repaired to the bar to compare injuries. The Aussie is currently little changed over 24 hours at US$0.8784.

I highlighted in this Report yesterday that the ECB had begun to buy small amounts of bank-issued covered bonds from across the eurozone, as part of its QE-style stimulus, but that the European stock markets had fallen steeply anyway, possibly because they were hoping the central bank would announce government bond purchases. Last night the ECB revealed it was planning to also buy corporate bonds, in its efforts to overcome the fact it can’t, under existing eurozone rules, buy government bonds. European traders seemed to like that particular news, so the German DAX jumped 1.9% and the French CAC 2.3%.

In a delayed reaction, Apple shares closed up 2.7% in New York last night. Apple’s quarterly result had come out after the bell the night before, and after-market trading was very flat. Perhaps it just took time to really sift through the numbers. Either way, when Apple shares rise, it’s a king tide for US stock markets. On the lead-in from Europe and Apple, Wall Street opened up a little but then pushed ever higher all session.

The Apple result had come in stark contrast to the weak IBM result on Monday night, highlighting the widening gap between “new world” and “old world”. Well two other relics of the past also bit the dust last night – burgers and Coke. McDonalds (Dow) fell 0.6% on its “miss” while Coca-Cola (Dow) plunged 6%. Coke management tried to lay the blame on the strong US dollar rather than the reality no one wants to drink fizz anymore. (See: Coca-Cola Amatil)

These mixed results proved no impediment to the US stocks indices, nevertheless. Apple helped the Nasdaq post its biggest one-day rise in 21 months, after having risen strongly on Monday night as well. Two weak Dow components could not drag down the average, as IBM had done on Monday night. Front and centre of trader enthusiasm was not simply earnings results, but the oil price.

Brent crude rose US86c to US$86.21/bbl last night and West Texas rose US43c to US$82.86/bbl. As to whether this represents merely a relief rally in a continuing downtrend or the end of the elastic band is yet to be seen, given we’re still waiting for the OPEC meeting, but Wall Street took it as a positive sign nonetheless. Throw in the fact that the 40-odd people who had been in contact with the Texas Ebola victim have now completed their quarantine period without as much as a sniffle, and two of the world’s major fears du jour have been eased.

The Chinese data no doubt helped oil, and clearly helped the copper price, which last night rose over 1% in thin LME Week trading. Aluminium and zinc also rose around 1% while the others were mildly positive.

Iron ore rose another US30c to US$81.50/t.

Gold is up a tad more to US$1248.50/oz, despite the US dollar index surging back 0.5% to 85.35. It had looked like the greenback might retreat from its highs on renewed Fed dovishness, but the ECB’s corporate bond plans once again underscore the “race to the bottom” between global central banks, with regard their currencies. The US ten-year bond yield rose 2 basis points to 2.20% while in Europe, the yields of all the Club Med economies fell sharply once more.

The SPI Overnight closed up 55 points or 1.0%, so it looks like we’re back to the rebound today.

BHP Billiton ((BHP)) will release its September quarter production report this morning, which may or may not have some say in that matter. And later Australia’s September quarter CPI data will be released. The headline number is forecast to come off sharply from June’s 3.0% (see: oil, food) while the RBA’s core numbers are forecast to retreat a little, supporting the central bank’s appraisal in the aforementioned minutes.

Mind you, the numbers are provided by the ABS, so any number is possible.

The US monthly CPI will be released tonight.

Rudi will appear on Sky Business this evening at 5.30pm.
 

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