The Overnight Report: Iron Will

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By Greg Peel

The Dow closed up 88 points or 0.5% while the S&P gained 0.5% to 2107 and the Nasdaq added 0.4%.

Stormy Weather

The focus for the national market in Australia yesterday was the CPI numbers. The focus in Sydney and surrounding regions was out the window. For the banks, the RBA’s interest rate decision is important. For the insurers, gathered in the same financials sector, the extent of damage on the east coast of NSW is clearly a concern.

The March quarter headline CPI came in at 0.2% quarter on quarter for 1.3% annual growth. The trimmed mean, or “core”, CPI grew 0.6% for 2.3% annual. Both numbers were a whisker above consensus just ahead of the release. The unusually wide gap between headline and core reflects a 12.2% drop in petrol prices over the quarter.

The whisker above seemed enough to spook markets into thinking maybe a May rate cut is not a given. Economists disagree, noting the numbers are within the RBA’s latest inflation forecast ranges and thus should provide no impediment to cutting the cash rate one more time.

Forex traders were not convinced, sending the Aussie up 0.6% to US$0.7754.

Doubt was enough to see the financials sector leading the market down yesterday with a 0.9% fall, with insurers joining the banks as the damage bill for the east coast storm is clearly rising. Energy was also hit on a drop in oil prices, while the telco and industrials finished in the green.

Beyond that we seem, at present, simply to be going up and down with Wall Street. It’s not clear why, given Wall Street, at present, is simply going up and down on daily earnings results. Monday night saw some weak reports, thus Dow down 80, and last night saw more positive results, hence Dow up 80.

Treading Water

Last night once again saw all three major US stock indices close above their respective “big figure” levels of 18,000, 2100 and 5000. Wall Street has been going up, down, up, down but not actually going anywhere. Likewise Australia.

Last night saw well received earnings reports from what Americans would see as staples companies, being Dow components McDonald’s and Coca-Cola. Sticking to the Dow members, Boeing posted a beat but fell given a strong run-up in share price, and Visa saw its shares jump on an announcement China will open up its market to card transaction clearing.

In economic news, US existing home sales rose a better than expected 6.1% in March, suggesting a revival after a slow start to the year due to the weather. The FHFA price index of houses on Fannie/Freddie mortgages rose 5.4% year on year to February.

That index is now back at January 2006 levels, which is about when things really started to go nuts in the US mortgage market. It is 2.9% below the March 2007 peak, which is about the time the wheels started to fall off.

The existing home sales news represents the first bit of positive US economic data in about around a month, and signals to markets that arguments about snow impacting on March quarter data may not be off the mark. If a spring economic rebound is on the cards again, as it was in 2014, then we’re back to debating a June Fed rate rise again.

Last night the US ten-year yield jumped 6 basis points to 1.97% and gold fell US$15.30 to US$1186.50/oz, despite the US dollar index being up only slightly to 98.02.

Rising Sun

As a side note, much has been made lately of the tech-laden Nasdaq index re-conquering the 5000 level for the first time since 2000. Well yesterday the Japanese Nikkei stock index re-conquered 20,000 for the first time since 2000.

That’s a 15% rise for the Nikkei this year. Mind you, the all-time high for the Nasdaq is just a little over 5000. The all-time high for the Nikkei is almost 39,000, achieved in 1989 at the peak of Japan’s stock/property bubble that subsequently burst and ushered in 20 years of winter.

Either way, two years ago the BoJ looked to Fed QE and saw that it was good, and Wall Street has surpassed its previous all-time highs in the interim, and earlier this year the ECB looked to Fed QE and BoJ QE and saw that it was good, and now the German DAX has travelled into all-time high territory. Meanwhile, the RBA is struggling with a decision whether or not to cut its rate to 2.0%, and the ASX200 remains 17% below its 2007 all-time high.

Iron Capitulation

Someone get Twiggy’s heart pills, the spot iron ore price has jumped US$2.10 or 4% to US$52.90/t.

While Tuesday’s quarterly report from Rio Tinto ((RIO)) indicated the company’s iron ore expansion plans remain on track, yesterday’s report from rival BHP Billiton ((BHP)) indicated the company would slow the pace of its own Pilbara expansion, due to low iron ore prices. Following production curtailments from the likes of Atlas Iron ((AGO) and Arrium ((ARI)), Australia, and thus the world, is finally seeing a meaningful supply-side response to the iron ore price collapse. Bottom in place?

The rest is now up to China. The fall in the iron ore price has been all about increased supply, given China continues to buy increasing volumes of iron ore. China is the king of stocking low and destocking high, and demand for steel in China has waned. Will a price revival bring a negative demand response from China? That will depend on Beijing’s plans for any further infrastructure and housing stimulus.

Base metal prices were mixed and largely inconsequential last night, except perhaps for a 1.4% rise for zinc.

The oils went in both directions as the West Texas contract rolled into June delivery, in line with Brent. WTI fell US42c to US$56.19/bbl while Brent rose US87c to US$62.68/bbl.

Today

All eyes will be on HSBC’s flash estimate of China’s April manufacturing PMI today. Flashes will follow from Japan, the eurozone and US.

A busy day on the local stock front sees production reports due from Newcrest Mining ((NCM)), BC Iron ((BCI)) and Sandfire Resources ((SFR)) while Telstra ((TLS)) will hold an investor day, Australian Pharmaceutical Industries ((API)) will report interim earnings and later ResMed ((RMD)) will report quarterly earnings in the US.

Rudi will appear on Sky Business's Lunch Money, at noon, and again between 7-8pm on the same channel for Switzer TV.
 

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