The Overnight Report: Show Me The Way

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By Greg Peel

The Dow closed down 104 points or 0.6% while the S&P lost 0.6% to 2091 and the Nasdaq fell 0.3%.

Looking For Direction

A choppy session on Bridge Street in a smallish range was indicative yesterday of a market lacking any obvious catalyst at this point, and waiting to see what happens next. The 6000 level on the ASX200 will unlikely be conquered on the back of further gains for overpriced yield plays, which leaves the underperforming resource sector as maybe the only near term driver.

The pullback in the greenback has brought rebounds in base metal and energy prices but not so iron ore (as of yesterday), while a subsequent return to strength for the Aussie is tempering any gains and disappointing other sectors in the market. Those sectors will be hoping, however, the Aussie rebound will hurry up the RBA.

The mood in the resource sector was not helped yesterday by a disappointing PMI estimate out of China. Just when it appeared China’s manufacturing sector may have turned the corner back into expansion in February, HSBC’s March flash estimate indicates a fall back into contraction at a surprise 49.2, down from 50.7.

Mind you, we’re still experiencing the usual Chinese New Year reverberations.

Bad & Good News

Lack of direction on Bridge Street is reflecting a similar theme on Wall Street as investors continue to mull over the implications of last week’s shift in Fed policy. With all three major US indices trading near all-time highs, investors are similarly wondering what it will take to push on further.

Presumably Wall Street will not rally strongly from here on weak US data, despite the “bad news is good news” and vice versa theme currently back in play. Forecasts for the timing of the first Fed rate rise now range from here to eternity but were the Fed to hold off until next year given a tepid US economy, is that cause enough for stocks to rally?

Last night US stocks fell, because good news is bad news.

US inflation rose in February for the first time since October, with the headline CPI posting a 0.2% gain thanks to a rebound in energy and food costs. This was as expected, albeit a similar 0.2% gain for core inflation (ex food & energy) beat 0.1% expectations. The headline CPI is flat year on year, while the core is up 1.7%.

New home sales hit their highest level in seven years in February, increasing by 7.8%. Markit’s flash estimate of the March manufacturing PMI indicated a rise to 55.3 from 55.1 in February when economists were forecasting 54.6.

The downer was a fall in the Richmond Fed activity index to minus 8 from plus 3, but all up Wall Street saw data last night that were more likely to bring forward a rate rise rather than delay it.

You wouldn’t know that from the US bond market however, which saw the ten-year yield fall 4 basis points to 1.88%.

Earnings Await

Whatever the data, the proof of the US economic pudding will be in the earnings. Next week sees the US March quarter corporate earnings season begin and expectations are not upbeat. Forecasts have the S&P500 stocks returning net flat earnings growth, largely due to the impact of the strong US dollar on large cap multinationals.

There has been a lot of whinging going on from the multinational sector of late, as one by one the big boys downgrade their expectations and blame the surging greenback. It’s not hard to see why Wall Street fears a rate rise, particularly at a time everyone else is easing monetary policy.

On that note, an estimate of the eurozone composite PMI (manufacturing plus services) last night indicated a three-year high 51.9, up from 51.0 and beating expectations. Europe is beginning to see the benefits of money printing. The UK has been printing money since the GFC but last year looked ready to beat the Fed to the first rate rise, given economic strength. That has since waned, and last night the UK CPI for February came in at zero, for the first time ever.

Commodities

The US dollar index stabilised last night, rising 0.2% to 97.17. The Aussie is steady at US$0.7876, and gold is largely steady at US$1193.10/oz.

The balance of a weak PMI out of China but solid numbers in the US and Europe had base metal markets undecided last night. Nickel fell 2% but the others were mixed on negligible moves.

The oils were similarly quieter last night, with West Texas little changed at US$47.39/bbl and Brent down US64c to US$55.13/bbl.

One swallow does not a summer make, but iron ore is up US$1.40 to US$55.60/t.

Today

The SPI Overnight closed down 10 points or 0.2%.

US durable goods is the data point to watch tonight, while Germany’s IFO business sentiment index will also be scrutinised.

Before that, the RBA releases its six-monthly Financial Stability Review today. It’s a document that usually doesn’t spark too much in the way of market response but with the banks trading at premiums to valuation, any mention of bank capital requirements and/or macro-prudential controls might have an impact.

Nufarm ((NUF)) releases its interim result today.

Rudi will appear on Sky Business's Market Moves, 5.30-6.00pm.
 

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