The Overnight Report: Oh, It Was Just A Dream

This story features NATIONAL AUSTRALIA BANK LIMITED. For more info SHARE ANALYSIS: NAB

By Greg Peel

The Dow closed up 6 points while the S&P fell 0.4% to 2041 and the Nasdaq lost 0.2%.

Please note: Henceforth the Overnight Report will be published in a slightly different, ezi-read format for the benefit of those accessing the website via hand-held devices.

Rally Tops Out

All the ducks had lined up for a strong day on Bridge Street yesterday and indeed it was, but interestingly the high for the day was posted on the open, up almost 100 points. After several days of consecutive strength and a new post-GFC high, this looked like a classic “blow-off” at 3pm when the index was only up around 30 points.

No surprises that profits should be taken, although we did see a late kick to the close of 70 points up. The iron ore price has been falling and falling these past sessions until Tuesday night, when it bounced slightly. But the market has been buying and buying the materials sector and yesterday saw another 3.3% gain, to lead the market.

Must be all this talk of whether one just has to own BHP and Rio.

Otherwise, energy was in there again, and the banks, but this time Telstra missed out when most other sectors posted healthy gains.

Services PMIs

Australia’s service sector PMI showed an increase to 49.9 in January from 47.5 in December, and the survey conductors predict expansion in February (50+) on the back of the RBA rate cut. China dragged the chain once more, with HSBC’s measure showing a fall to 51.8 from 53.4. Japan also drifted, to 51.3 from 51.7.

The big winner was again the UK, which saw a rise to a spirited 57.2 from 55.8, while the eurozone continues to impress (ahead of QE actually being felt), showing a rise to 52.7 from 51.6. The US saw a slight tick-up, to 56.7 from 56.5.

China Eases

Since mid last year, economists have been predicting monetary policy easing measures ahead in China, in the face of controlled inflation, in order to prop up the slowing economy. Interest rate cuts and/or cuts to the bank reserve requirement ratio (RRR), controlling what amount Chinese banks must hold as capital, have been anticipated. Late last year we saw a rate cut, and late yesterday we saw a 50 basis point cut to the RRR, to 19.5%.

While of no surprise, this move will be seen as a positive across global markets. But then there are other forces at work as well.

Oil Tanks

I flagged it yesterday, and indeed it played out last night. The short-covering fuelled snap-back rally in oil ended in spectacular fashion last night, as West Texas plunged 9% to its afternoon settlement. In late electronic trading, West Texas crude is down US$3.81, or 7.2%, to US$48.88/bbl, and Brent is down US$2.98 or 5.2% to US$54.74/bbl.

Nothing ever “bottoms” on a snap-back rally worth 25%. It’s a trap for young players. Fundamental oil analysts are still talking possible 30-something dollar WTI oil ahead, given the race to reduce US supply is still lagging way behind excess production. Others suggest 40 will probably hold it, but we have to see a reduction in volatility before a “rounding bottom” can form at a realistic level.

Greece

On Tuesday night global markets were relieved to hear the new Greek government would not push for an EU-IMF debt write-off. But last night the ECB chimed into the game, revoking a waiver which had allowed Greek bonds to be used as collateral in exchange for liquidity hand-outs from the central bank.

Talk of a “Grexit” is again rife.

The euro thus duly fell back last night, pushing the US dollar index back up 0.4% to 94.98. The US ten-year yield rose another couple of points to 1.80%, while gold stood still at US$1264.30/oz. The Aussie is off 0.2% at US$0.7791.

Wall Street

In now typical fashion the Dow was up only slightly after 2pm, up a hundred at 3.40pm, and closed flat at 4pm. The average was not the best indicator last night nonetheless, given the influence of a 7% jump for Disney, after posting a very strong and very “Frozen” profit result, balanced by the influence of the two big oil names in the basket. So best we look at the “real” index, the S&P500, which closed down 0.4%.

Adding to net weakness on Wall Street last night was the January private sector employment numbers from ADP, which showed 213,000 new jobs created when 240,000 was expected. For the Fed, it’s primarily all about jobs, jobs and jobs so Friday night’s non-farm payrolls release will be interesting.

Metals

Copper managed to hold relatively steady last night following its near 4% surge on Tuesday night, despite the bounce-back in the US dollar, no doubt supported by the Chinese RRR cut. Other metals were mixed on insubstantial moves.

Whereto the local material index today? Iron ore is down US60c to US$61.40/t.

Today

The SPI Overnight has closed down 10 points. If everyone who’d been buying energy stocks this past week bottled today, this might seem a bit light on. And ditto materials. But resources stocks are only half the equation at present alongside yield stocks, and the Chinese RRR should offer some comfort all around.

Australia will release retail sales and home sales data today and NAB will provide a December quarter summary of business confidence.

The local earnings season starts to hot up today, as a handful of companies publish reports and National Bank ((NAB)) provides a quarterly update.

Rudi will make an appearance on Sky Business' Lunch Money, noon-12.45pm today.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms