The Overnight Report: Here Comes Europe

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By Greg Peel

The Dow closed up 64 points or 0.4% while the S&P rose 0.2% to 2114 and the Nasdaq added 0.5%.

Misleading

Yesterday on the local market we saw another plunge from the open as the sell-off continued. At 11.30am a positive surprise on GDP popped its head up but was quietly steamrolled over by a market driven by technical momentum and a fundamental ongoing rise in bond rates in Germany which is translating to bond rate rises in the US and across the globe.

Higher global bond rates make Australia’s yield stocks less attractive, so it’s not just domestic sellers in there trashing our market at present.

Joe Hockey took credit for yesterday’s positive GDP result which is surprising, given that over which he has any control registered 0.0% growth. But Joe’s just the most recent in a long line of treasurers who think they can spin any numbers to political advantage. The 0.9% quarter on quarter growth result was an improvement on December’s 0.5% but not enough to prevent the annual growth rate falling to 2.3% from 2.5%.

If we split the result into exports and domestic demand we see 0.5 percentage point growth for the former, as we were tipped off about in Wednesday’s current account numbers, and a flat result for the latter. Household consumption rose 0.3ppt and inventories rose 0.3ppt but business investment fell 0.5ppt and public spending was flat. Inventory growth is a worry, as it may imply growing confidence in the ability to sell more product or it may imply misplaced confidence, over-buying and a lot of discounting required ahead to move surplus stock.

In terms of the export result, we do tend to forget that the “mining boom” is not over, it’s just matured. The domestic economy is no longer benefiting from mining capacity investment but increased supply is now providing for greater volumes of exports, sufficient to offset commodity price weakness. But with business investment still heading south, and a lot more of the decline in “mining” investment to come (mostly LNG), it’s hard to see just what is going to spark up the non-mining side of the economy.

The government’s small business package? I think the emphasis is on the word “small”.

Whereto?

On a technical basis the next level of support for the ASX200 is 5575. Two weeks ago we traded at 5574 intraday before the bargain hunters moved in and eventually we rallied to back above 5750. Failure to hold that has seen us drop back under 5600, closing at 5583 yesterday with no cavalry in sight.

Last night the US ten-year bond yield jumped another 10 basis point to 2.37%. This was largely a result of the ECB increasing its 2015 eurozone inflation forecast to 0.3% from 0.0% at last night’s policy meeting. The German ten-year yield jumped 20 basis points to 0.89%.

Today’s action will be a test of whether the local bargain hunters still see the same level from two weeks’ ago as a bargain. The fundamentals of rising global bond yields are very much pressuring the market the other way. On Monday morning the SPI futures closed up 18 points and ASX200 subsequently fell 99 points. Yesterday morning they were up 17 and we fell 52. This morning they’re up 6 points.

Maybe the day to buy is when the SPI Overnight closes down.

Beige

Last night’s ADP private sector jobs report in the US showed 201,000 jobs added in May, up from 165,000 in April and the best result in four months. The result fell short of forecasts of 215,000, but the number that matters is tomorrow night’s non-farm payrolls, and Wall Street will reserve judgement until that is released.

The 201,000 result was “okay”, just as April’s non-farm payrolls result was “okay”. Last night the Fed released its regular anecdotal assessment of the US economy, its Beige Book, and declared the pace of growth to be “modest to moderate”, and suggested there are signs of a rebound out of the weak first quarter.

There is nothing here to imply either a sooner Fed rate rise or a later Fed rate rise. Thus the US stocks indices meandered through the session to a modest gain.

The US dollar index fell again, by 0.6% to 95.34, on another move up in euro thanks to the ECB’s inflation forecast. The RBA will be relieved that 78 at least seems to be the ceiling on the Aussie for now, as despite yesterday’s positive GDP result and another drop in the US dollar index, the Aussie is steady at US$0.7779.

Commodities

That the ECB should see a brightening outlook for the eurozone economy is not good news for gold bugs, so despite another fall in the greenback, gold fell US$8.40 last night to US$1184.60/oz.

LME traders are happy to sit it out until the US jobs numbers hit the wire, hence base metal prices were again mixed on small moves.

Iron ore rose US50c to US$62.60/t to mark a three-month high.

Oil traders will also be keeping an eye on Friday night’s jobs numbers but for them another focus of attention will be Friday night’s OPEC meeting. Although no one expects Saudi Arabia to waver from its stoic stance against US shale oil overproduction, there is a slight chance smaller producers may force at least some capitulation on OPEC quotas. Thus the feeling is a reinforcement of current quota levels will send oil prices south on disappointment.

Squaring up is thus sensible, and last night West Texas fell US$1.45 to US$59.61/bbl and Brent fell US$1.62 to US$63.76/bbl.

Today

As noted, the SPI Overnight closed up 6 points.

With the March quarter now filed away, locally the market will look to today’s April retail sales and trade balance numbers for direction. That sales result is nevertheless pre-May rate cut and pre-budget, so economists are primed for a soggy outcome.

Challenger ((CGF)) will hold an investor day and ANZ Bank ((ANZ)) do the same for its New Zealand business.

Rudi will appear on Sky Business twice today. At midday (noon-12.45pm) for Lunch Money and again between 7-8pm on Switzer TV.
 

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