The Overnight Report: Numbers, Not Words

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By Greg Peel

The Dow closed up 227 points or 1.3% while the S&P gained 1.2% to 2099 and the Nasdaq rose 0.9%.

Fed Bombshell

It matters not what happened on the Australian market yesterday given last night’s global market movements. It was a mixed session on Bridge Street which betrayed no directional aspiration ahead of a flat close, as might be expected ahead of the important Fed policy meeting.

As was expected, the FOMC removed the word “patient” from its monetary policy statement, with regard the timing of the first US rate rise. This word last year replaced “considerable period”, which had been left as the only marker after the axing of Ben Bernanke’s specific time scale. With patient gone, the Fed is now fully data-dependent.

Thus we have moved from dates to data, from words to numbers. Not a bad move, one might suggest, given the extraordinary significance previously placed upon one little adjective. But if the removal of “patient” was to be expected, what came next was not.

Markets around the globe had assumed that if “patient” goes, the clock would then start ticking for the first rate rise, and that it would come sooner rather than later. The removal of “patient” would be a “hawkish” development. But nothing could be further from the truth. Indeed, Fed chair Janet Yellen “released the doves” last night when she effectively downgraded the central bank’s outlook on US economic growth, and on inflation, and even down-played recent strength in US jobs numbers.

For several months now, virtually all US data points outside of non-farm payrolls have been disappointing. The momentum apparent towards the end of last year has faded, as is evidenced ultimately by flagging GDP growth. The boost to the consumer expected by all and sundry from lower oil prices has simply not manifested. If anything, the opposite is true. Yet last month’s US jobs number was a cracker – a shock to the upside – and so the markets said “here it comes”. The removal of the word “patient” would confirm the Fed was preparing for lift-off.

Now, we’re back to no one knowing for sure when lift-off might be. The Fed doesn’t know, because that decision will be based on data that is yet to come.

Forex Shock

The US dollar has also been part of the problem, given it has run very hard of late not on an improving US economy – the opposite is more apparent at present – but on the impact of ECB QE and the collapsing euro. Throw in the QE-supported yen, a still QE-supported pound and incremental easing from the PBoC and the greenback has been elevated well beyond what US domestic fundamentals might suggest. On last night’s Fed bombshell, the US dollar index crashed a rarely seen 2.5% to 97.21.

Anticipation of a Fed rate rise should see upward pressure on US bond yields but they, too, have been fighting against the differentials of European bonds trading on negative or near negative yields. Last night all US Treasury yields crashed by double digit basis points, with the benchmark ten-year down 11 bps to 1.95%.

Gold has been wallowing lately as anticipation of a Fed rate rise offset excess euro liquidity, so it jumped US$23.80 to US$1172.50/oz.

Commodity Capers

While the oil price has fallen on excess supply, the strong US dollar has also played a part in keeping oil prices low. Thus last night the dollar sell-off sparked short-covering in oil, sending West Texas up US$1.90 or 4.4% to US$45.03/bbl and Brent up a whopping US$2.96 or 5.5% to US$56.46/bbl.

Usually the LME is closed ahead of the release of the Fed statement but this month a variation in summer time changeovers allowed but the briefest of windows in which base metal traders caught a glimpse of the statement before the final bell. All day they sold metals down, convinced the word “patient” would be removed. And when the statement was released, they were right.

Zinc closed down 0.4%, aluminium 1.0%, lead 1.3%, copper 1.5%, nickel 1.8% and tin 2.5%. There will have been some red faces around The City shortly afterward, once the full statement has been read and Janet Yellen’s press conference was underway. Watch out for some scrambling tonight.

It is a different story, however, in the iron ore market. Spot iron ore has never paid much attention to global macro developments, being focused more intently on Chinese steel production and global ore production. Last night iron ore fell US$3.10 or 5.4% to US$54.50/t.

Bad News is Good

Bad news in the form of spiralling iron ore prices is not good for Australian miners, but bad news in the form of the Fed recognition of a not-so-hot US economy and subsequent caution with regard monetary policy is music to the ears of stock market investors. We recall that the recent spate of volatility on Wall Street was triggered by the shock jobs number, which sent US indices tumbling on a “good news is bad” basis. Last night, we went the other way.

Given building anticipation of the removal of “patient”, the Dow was down 150 points ahead of the statement release. It then rallied 370 odd points to the close, regaining 18,000. The S&P regained 2100 but slipped back a notch at the bell, and similarly the Nasdaq again saw 5000 before settling at 4982.

Tomorrow Wall Street will wake up to a new world – one in which Fed rhetoric has been put to bed and all that will matter from now on is the data.

Today

The SPI Overnight is up 27 points or 0.5% but the big move is in the Aussie dollar. Thanks to the big plunge in the greenback, the Aussie has shot up 2.4% or just under two full cents to US$0.7796.

The pressure will really be on for Australia’s pure-play iron ore miners today. Yesterday saw Fortescue Metals ((FMG)) withdraw a convertible bond issue only one day after having announced it, implying no interest from the market. The smaller players will really be hurting on another three dollar drop in the iron ore price.

Energy stocks, on the other hand, will likely see an up-day to follow yesterday’s down-day which followed the big up-day the day before. Energy stocks pay yield, and, miners aside, a postponed US rate rise is only another fillip for Australia’s widespread range of yield-paying stocks.

On the other hand, that Aussie’s a worry, as the RBA continues to point out. It was too high at 76 according to the central bank, so 78 doesn’t help much. That the Fed does not look like raising rates in a hurry may just hurry up the next rate cut from the RBA.

There may be some additional volatility on the local market today given the futures and index options expiry.

Myer ((MYR)) will release its interim result today and Sigma Pharmaceutical ((SIP)) its full-year.

Rudi will appear on Sky Business's Lunch Money at noon.
 

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