The Overnight Report: Break Up?

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By Greg Peel

The Dow rose 191 points or 1.1% while the S&P gained 1.1% to 2121 and the Nasdaq added 1.4%.

And down again…

Wednesday’s budget party quickly turned into yesterday’s hangover as the ASX200 gave back everything it had gained on Wednesday and more by lunchtime, before finding some stability towards the close. Initial excitement waned as one by one, economists pointed out that the glossy shine on Joe’s second attempt actually hides the fact it is still a fiscally contractionary offering.

Or maybe everyone cottoned on to the fact that if the budget brings a spree in iPad sales, the major beneficiary will be Apple, which doesn’t even pay tax here.

The consumer sectors did actually hold up yesterday to finish slightly in the green again, despite a net weaker index. Remember how I noted yesterday everyone seemed to miss the Chinese data in the budget haze? Well yesterday the materials sector led the market down with a 1.2% fall. There was also an outlier at play, with ResMed’s ((RMD)) heart attack dragging down the healthcare sector by 1.2%.

Perhaps the good news yesterday is that we did see a modicum of sanity return to the Aussie dollar, as buying eased off and the currency began to fall back from threatening 82c. Seems like only the other day we were looking at 75c, and we’ve had a rate cut in between. It’s mostly to do with the US dollar part of the equation nonetheless, but despite the US dollar index being down 0.3% to 93.36 last night, the Aussie is still down 0.4% over 24 hours to US$0.8080.

Still Super Mario

It was Ascension Day in Europe, which must be why the German DAX rose 1.8% in thin holiday trade. Or it might have been because Mario Draghi, in a speech he was delivering, reaffirmed his commitment to ECB QE for as long as it takes to put the eurozone economy back on a stable footing.

Whether or not that will include a contribution from Greece is yet to be determined. Last night the Greek finance minister suggested at a conference that Greece’s debt repayment obligations to the ECB should be pushed into “the distant future”. No doubt that went down well.

Aside from strength in European stocks, Draghi’s speech also sparked some lost strength in European bonds, and for once yields fell back. This was not lost on US bond markets.

Record Territory

Last night’s release of the US producer price index for April showed a 0.4% decline following a 0.2% gain in March, against economists forecasts of a flat result. The headline PPI has fallen in seven of the past nine months.

This provides heart to those hoping the Fed won’t raise its rates too soon, and was also the reason the US dollar index was again lower. But the headline number is not what the Fed is watching. The headline PPI showed a 1.3% year on year decline in April but the core PPI showed a 0.7% gain. The difference is, of course, the oil price. Still, 0.7% is hardly suggestive of runaway inflation.

So why did Wall Street suddenly take off last night?

Primarily it was because the mischievous bond market actually decided to behave itself last night. The US ten-year yield fell 4 basis points to 2.24% on the back of the PPI as well it should, and stayed there, rather than jumping back up 10 bips as it has been wont to do recently.

The debate still rages over why US bonds have suddenly been sold off when a Fed rate rise is not yet looming on the horizon. Oversupply of corporate issues meeting lack of buyers of government paper, technical breaches, moves in Europe, overbought “bubble” giving way – all of these factors have been argued and likely all have been conspiring together. What everyone does agree on is it has had nothing to do with fundamentals, and that has made US stock markets nervous. So last night, confidence returned.

The close of 2121 for the S&P500 not only marks another new record high, technical analysts suggest a close above 2020 represents a break-out of what has been a fairly entrenched 2015 year to date range. We shall see. Meanwhile, the Dow is still short of its all-time high, albeit by only 0.2%. But it you want to talk tea leaves, technicians will point out that the Dow Transports average is actually trading at a 2015 low. Dow Theory dictates that any new leg in the bull market requires both the Dow Industrial and Transport averages to be firing.

Of course with bond rates so low and the market overcrowded, many attribute Wall Street strength simply to the TINA trade – there is no alternative, if you want to see any return on your investment. One wonders how Tina might respond when the Fed finally hikes.

Just a dream?

The tip-over in the recovered iron ore price continued last night with an accelerated US80c fall to US$61.20/t. It is fair to say most observers have been expecting consolidation following the sharp rebound, but it doesn’t mean mining investors won’t become nervous again. Until iron ore can move more emphatically into the sixties, many smaller miners are still burning cash.

The falling US dollar is still failing to fire up base metal prices, as LME traders continue to worry about Wednesday’s weak Chinese data. Trading was thin last night with most of Europe celebrating Ascension Day, allowing lead to fall 3% and aluminium, nickel and zinc to all fall around 1%.

The oils had a quieter session as well, with West Texas falling US43c to once again be back under 60, at US$59.70/bbl, while Brent ticked up US18c to US$66.59/bbl.

Gold added another US$6.00 to US$1221.10/oz. Could gold, too, be breaking out? Best to see some further proof, one might suggest.

Today

So does the yo-yo go up again today? The SPI Overnight closed up 36 points or 0.6%.

The banks will be initially handicapped by National Bank ((NAB)) going ex-div. Oil Search ((OSH)) is among those holding an AGM today while it appears Paladin Energy ((PDN)) will provide its quarterly result today and not yesterday, as calendars had assumed.
 

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