The Overnight Report: Mario Hits It Out Of The Park

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By Greg Peel

The Dow rose 259 points or 1.5% while the S&P gained 1.5% to 2063 and the Nasdaq added 1.8%.

One little bounce in the oil price and investors piled into Australian energy stocks yesterday, sending the energy index up 2% amidst much talk of oil having found a bottom. Cooler heads note that while announcements of significant global rig count reductions are indeed a positive for the oil price, it will still take some months to clear excess supply out of the market, so don’t expect too much too soon.

The local materials sector also found further support yesterday, rising 1.3% despite another fall in the iron ore price, but otherwise the market was mixed yesterday and an early surge gave way to squaring up in the afternoon ahead of last night’s much anticipated ECB meeting.

And they’re calling it Draghi’s own “shock and awe” moment, an expression that first was attached to monetary policy when, in its very first response to the 2007 “credit crunch”, the Fed cut its cash rate by 50bps. Turns out that was just a pop gun, in hindsight, ahead of 2008 and QE1. Here we are over six years later, and the ECB has announced it will purchase E60bn per month of eurozone government bonds – greater than the E50bn figure widely anticipated – and do so at least out to September 2016.

While markets had mostly already set themselves for a QE announcement, there was still just a little lingering doubt with regard the infamously “all talk and no action” Mr Draghi. Throw in the E60bn instead of E50bn, and suffice to say markets were jolted into action. The euro tanked 2% against the greenback, and the ten-year bond yields of all of Germany, France, Spain, Italy, Belgium, Portugal and Ireland hit record lows. The German bund hit a yield of 0.384%. A cracking return for a ten-year investment.

The US ten-year yield jumped another 4 basis points to 1.90%.

The German stock market has been “buying the rumour” all week and one might have even expected some profit-taking on “the fact” but no, the DAX added another 1.3% in response. Wall Street opened a little stronger as it awaited the ECB announcement and then took off thereafter, posting 1.5% gains.

Despite all the excitement, there is still much debate around markets as to whether a QE program in Europe will work. One can look to Fed QE as the benchmark and say that despite all the criticism over the years, the US economy avoided disaster and is in its current position of strength thanks to QEs 1, 2 and 3. But QE in the eurozone is a very convoluted and logistically complex affair, given there is no one European bond for the ECB to buy. And Europe still has other problems, mostly political.

The other question is as to whether this “shock and awe” ECB attack will have any impact on the Fed’s own pending rate hike decision. With every other major economy, and plenty of minor economies, fighting out a “beggar thy neighbour” battle of currency depreciation, one might argue the US is already experiencing a “rate rise” in relative yield terms. Last night the US dollar index shot up 1.3% to 94.12 as the euro plunged, and is now up around 17% over twelve months. The US is not a big exporter in relative terms, compared to the likes of Europe, China, Japan and Australia, but as the December quarter result season unfolds in the US, many an export company is bemoaning the strong greenback.

QE from anyone is usually good for the gold price, hence last night we saw 1300 broken as gold jumped US$9.10 to US$1302.30/oz.

The Aussie is down 0.6% to US$0.8053 and it looks like only a matter of time before we might kiss 80 goodbye. Next week sees the release of the local December quarter CPI numbers, and the following week brings arguably the most highly anticipated RBA meeting in a year.

The surge in the US dollar is not good news for dollar-denominated commodity prices. Copper copped the brunt of it last night, falling 1%. Nickel fell 1.8% but then the nickel price is far more volatile.

Iron ore fell US20c to US$66.30/t.

To return to my point above regarding a lag time before excess global oil supply is cleared out of the market, weekly US inventory data was released last night and while analysts rarely forecast these volatile weekly numbers accurately, plenty of gobs were smacked last night when crude inventories came in four times larger than expected. At 400m barrels, US crude supply is at its greatest for January in 80 years.

Suffice to say, West Texas fell US88c to US$46.68/bbl last night while Brent fell US11c to US$48.84/bbl.

Hang on to your hats. The SPI Overnight is up 64 points or 1.2%.

It’s flash day today across the globe. HSBC will release its flash estimate of China’s January manufacturing PMI ahead of Europe following suit, although that number has now lost its relevance. The US will also see a PMI estimate tonight.

On the local stock front, Santos ((STO)) will release its quarterly production report today and ResMed ((RMD)) has just released its quarterly earnings result.
 

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