The Overnight Report: Moussaka With Noodles

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By Greg Peel

The Dow closed up 208 points or 1.2% while the S&P gained 0.9% to 2100 and the Nasdaq rallied 1.3%.

Pullback

The Australian market had the opportunity to weigh up both counter-balancing announcements out of China yesterday having closed ahead of the first announcement on Friday night. Wall Street traded on Friday night knowing only that Beijing had tightened margin lending rules and expanded short selling opportunities and that Chinese stock index futures were down 6%. But before Bridge Street opened yesterday, Beijing had sliced a big chunk off the Chinese bank reserve ratio requirement.

So it was that the Shanghai index, which has been flying to the moon recently, only fell 1.2% yesterday when it could have been much worse. But while Chinese stimulus would on any other day be a positive for the Australian economy, the ASX200 fell 0.8%. Only the telco missed out on the selling, and even the materials sector was sold off despite it being the most direct beneficiary of easier Chinese policy. Did we blindly follow Wall Street down?

Or if we consider the two Chinese announcements effectively cancel each other out, are we simply worried about Greece? Wall Street was worried about both China and Greece on Friday night. Given that no one is really sure just what impact a Grexit would have, and given many Australian yield stocks have been called overvalued by analysts, perhaps it’s just better to be safe than sorry.

Or is it because having tried and failed three times to breach the 6000 mark, the index is set up for a pullback according to technical analysts, and we’ve listened?

That would make sense, except that last night Wall Street rallied back again, factoring in the Chinese RRR cut. This implies Wall Street is not actually worried about Greece. And the SPI Overnight closed up 42 points, suggesting we’re going to rally right back again today as well. Perhaps, therefore, we have blindly followed Wall Street without giving it too much thought.

Penniless Greeks

The Greek government needs US$2bn to pay public sector wages this month and it has to make an E1bn payment to the IMF on May 12. The Greek treasury has declared cash will be in the negative as of last night. In order to receive its next tranche of bail-out funds, Greece must provide its lenders with a comprehensive list of reforms the government intends to implement.

It is exactly those “reforms” the Greek people wanted to avoid, thus electing the current government which promised to tell Greece’s lenders where they could get off. Give us the money but you can stick your austerity. The IMF has now put its foot down, and eurozone finance ministers are set to meet on Friday to discuss the issue.

A Grexit moves ever closer.

Interestingly, if one were to take announced Chinese stimulus in isolation, particularly a full percentage point RRR cut, one would expect a big rally for base metals. Metals did initially rally on the LME last night but not for long, before succumbing to aggressive selling. Only volatile nickel managed to close in the green amongst falls for all other metals, including 1.5% for copper. Greece was cited as the concern.

And There’s Earnings, Too

Wall Street has been trying to focus on the micro but has been somewhat swamped by the macro the past couple of sessions, yet the earnings season rolls on. Friday night’s releases were not so great, thus aiding a 279 point fall in the Dow. Last night’s results were better, thus aiding a 208 rally in the Dow.

Last night saw a solid result for Morgan Stanley, providing for a small upward move, but star of the night was toymaker Hasbro which has the Transformer and Marvel Comic doll concessions and subsequently has been raking it in, strong US dollar or not. Its shares jumped 13%.

The US bond market, it would seem, has focused only on China these past two sessions, given nothing has changed in Greece. On Friday night the benchmark US ten-year bond yield fell 3 basis points to 1.85%, threatening a technical breach to the downside, but last night the yield rose 5 basis points back to the 1.90% level it’s been hovering around now for some time. That looks like an “as you were” trade.

And yet last night’s US data release was far from encouraging, with the Chicago Fed national activity index falling to a three year low of minus 0.27.

The US dollar index also rose last night, up 0.5% to 97.91, as the Fed feels ever more lonely in being the only major economy contemplating a rate rise in the face of everyone else’s easing. (Back in your box, Kiwis). This allowed the Aussie to fall, by 0.7% to US$0.7724, when again one might assume a rally thanks to Chinese stimulus.

Strong Oil

The is a growing feeling the oil price has now locked in its lows, yet oil traders remain tentative and are not yet prepared to call a definitive bottom. West Texas crude was up another US39c to US$56.42/bbl last night and suddenly 45 seems a long way away. Brent slipped US18c to US$63.50/bbl.

One feature of the March quarter in the US was a lack of low oil-driven consumer spending, as everyone had predicted. The snow factor played its part, but in the spring of the June quarter we find oil prices are now 20% higher than where they were in winter. Mind you, even 60 oil is a lot better, consumer-wise, than 100 oil.

The iron ore price ticked up again last night too, by US10c to US$50.80/t. Iron ore is also showing signs of putting in a bottom, yet analysts are becoming more pessimistic by the day.

The stronger greenback sent gold down US$7.90 to US$1195.80/oz.

Today

As noted, the SPI Overnight closed up 42 points or 0.7%.

The minutes of the April RBA meeting are due out today and while they will be scoured for clues of when the next rate cut might be, it must be noted the big drop in the unemployment rate in March was revealed subsequent to that meeting and tomorrow we get the March quarter CPI result.

Glenn Stevens will make a speech in New York tonight.

It’s a busy day on the local stock front, with production reports due from Rio Tinto ((RIO)) and Oil Search ((OSH)), updates due from Brambles ((BXB)) and Transfield Services ((TSE)) and an AGM to be held by Leighton Holdings ((LEI)).
 

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