The Overnight Report: Minutes Of Nothing

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By Greg Peel

The Dow closed down 26 points or 0.2% while the S&P lost 0.1% to 2125 and the Nasdaq was flat.

Sugar Hit

The ASX200 was again down over 40 points yesterday, by mid-morning, which was unsurprising on the back of big falls in commodity prices. The general fall also reflected what has been a soggy market all week, pressured by technical selling.

But while the material sector did indeed close the day down 1.6% and energy 1.3%, buying interest emerged in some sectors when the ASX200 hit the 5575 level. Healthcare’s had a rough trot, but it finished the day up 1.5%, and plenty of industrials have been caught in the down-draught, so that sector rose 1.1%. The banks were steady for once.

There may have been some incentive to buy on the mid-morning release of Westpac’s consumer confidence index for May. Having captured both the RBA rate cut and federal budget announcement, the index surged 6.4% to 102.4, marking the first time confidence has been on the optimistic side of the line (100) since February.

But realistically any budget influence was more a case of relief than enthusiasm. Last year’s shocker saw confidence plunge, so this year’s effort managed to reverse some of that angst. It could have been a lot worse, most Australians have decided. And if the stock market was strictly responding to a jump in consumer confidence, we should have seen that in the consumer sectors. Yet discretionary was flat on the day and staples slipped slightly.

Yesterday seemed more a case of the stock pickers moving in to snap up some beaten down names.

Sun Not Quite Rising

Japan released its March quarter GDP yesterday, and on face value it looked like Abe’s shock and awe stimulatory tactics have finally been vindicated. The Japanese economy grew at a 2.4% annualised pace in the quarter, trouncing forecasts of 1.5%.

The Nikkei jumped 0.9% as a result, and may also have had some influence on the buying downunder.

But drilling down into the numbers, the result actually isn’t that flash after all. Consumer spending did increase as hoped, given Abe is trying to manufacture inflation, but the biggest contributor to the solid net result was growth in inventories. In this day and age of “just in time” inventory management, inventory growth only implies goods that have failed to move.

Outside of the inventory impact, Japan’s GDP grew by only 0.4% annualised, a much more tepid figure. June quarter data already point to a slower pace of growth, and if those inventories start hitting the discount bins, Abe’s 2% inflation target will seem ever more distant.

Wobbly Wall Street

After some wild fluctuations earlier in the month, volatility on Wall Street has subsided notably this week. Why? Because the indices are back to all-time highs and recently whenever this happens, investors get nervous. March quarter GDP was weak, and may yet turn out to be a contraction on revision. Corporate earnings in the quarter were better than expected, but expected was very weak. The oil price has consolidated after bouncing from its depths but still at a much lower price than a year ago, yet consumer spending remains in the doldrums.

What are we doing at all-time highs?

The short answer is of course, the Fed, which has continued to hold off on normalising monetary policy and allowed the stock markets to carry on being juiced up by free money. A lot of that free money is being used to fund share buybacks, which lift earnings per share valuations, and to increase dividends, which entice investors to buy shares on a TINA basis compared to fixed income investment. There is no alternative.

The US bond market has also seen a rush of selling as traders begin to get a little nervous ahead of the Fed rate rise that will, eventually, come. That money has to go somewhere. TINA.

Back in April, the FOMC had decided a June rate rise was probably off the cards. So suggested the minutes of that policy meeting, released last night. On that news, Wall Street did a whole lotta nothing. For starters, back in April the market had already decided September would be the earliest possibility, and maybe even that was ambitious, and back in April is, well, back in April – a long time ago in the life of the world’s largest economy. Data releases since that meeting have for the most part been disappointingly weak.

The US dollar index did go up again last night, by 0.3% to 95.59, but only because the euro continued its plunge. The euro is still pulling back on news earlier in the week the ECB would front-load bond purchases in May-June, and also because recent eurozone economic data releases have been a little underwhelming.

The US bond market obviously saw nothing of interest in the minutes, as the US ten-year yield moved on one basis point, down to 2.25%.

Commodity Mix

The strengthening US dollar is not doing commodity prices any favours, although last night did see a little more stability following Tuesday night’s steep falls.

The oils managed a slight bounce, with West Texas up US78c to US$58.77/bbl in its new July delivery front month. Brent, already July delivery, was up US48c to US$64.85/bbl.

The LME closed ahead of last night’s release of the Fed minutes so there was reason to be cautious, thus last night’s moves were less dramatic. Zinc went on with it, nonetheless, falling another 1%, but nickel did manage a rebound of 1% after Tuesday night’s plunge.

Iron ore keeps ticking down, last night falling another US60c to US$57.80/t.

Gold was steady at US$1209.80/oz.

The rising greenback is at least providing further relief for the Aussie dollar, which is down another 0.6% to US$0.7872. This will please the RBA a little, but the RBA is always quick to point out that US dollars are not Australia’s only trading currency, and the weak euro, for example, is keeping that exchange rate elevated.

Today

The SPI Overnight closed up 17 points or 0.3%, which suggests futures traders are expecting more bargain hunting among stocks today. Mind you, futures traders have been wrong all week.

Lock up your children, the flashers will all be out and about today and tonight. We’ll see flash estimates of May manufacturing PMIs from China (HSBC), Japan, the eurozone and US.

It’s a crowded night for US data releases, including existing home sales, leading economic indicators, the Philly Fed activity index and the Chicago Fed national activity index.

On the local stock front, James Hardie Industries ((JHX)) will release its quarterly result, Woodside Petroleum ((WPL)) will hold an investor day and G8 Education ((GEM)) will discuss the ramifications of the government’s planned child care changes in the budget at the company’s AGM.
 

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