Daily Market Reports | Jun 18 2015
By Greg Peel
The Dow closed up 31 points or 0.2% while the S&P gained 0.2% to 2100 and the Nasdaq added 0.2%.
Excitement
Gotta love that red cordial.
Bridge Street was buffeted by the winds of exuberance yesterday on the thought that the biggest investor of them all might be interested in little old Australia. Not just an insurance partnership, it would seem, but perhaps banks as well and, gosh, who knows what else?
The financials led the charge yesterday with a 1.6% gain and to be fair, there has been much talk from stock analysts that following their solid correction, bank shares have returned to something estimating reasonable value. But falls in base metal prices and a near 4% plunge in the iron ore price overnight did nothing to prevent a 0.8% gain for the materials sector, and there was no rise in oil prices to justify a 1.6% jump for energy.
When the dust had settled only the fully valued healthcare sector missed out on the fun, falling 0.1%, while consumer staples remained flat on the news a failing supermarket chain had decided to pull the trapdoor underneath its CEO.
Insurance market analysts were quick to dismiss any notion yesterday, nonetheless, that Berkshire Hathaway’s partnership deal with IAG represented any form of endorsement of the Australian market in general by the great man himself. The deal is all about a safe and secure backdoor entry into China – the ultimate objective.
A 1.1% rally for the ASX200 represented a potentially risky trade yesterday, ahead of last night’s Fed statement release and press conference, and ahead of tonight’s meeting of eurozone finance ministers (See: Greece). The greater risk was and is to the downside.
Later This Year
That the US stocks markets moved only slightly last night and the US ten-year yield lost a mere point to 2.31% is testament to the fact last night’s Fed statement offered nothing new in the way of policy guidance, and Fed chair Janet Yellen was very careful to be vague at her press conference. “September, December, March…whenever it does happen…”
The US markets decided it was a rather dovish stance taken by Yellen, when no one would have been surprised if she had blurted out “Lift off in September!”. In her press conference Q&A, she variously waved around “later this year” and, as noted above, maybe not even until March as possible timetables. Thus market commentators remain split this morning between those believing there will not be a rate rise this year, and those still believing there not only be a rate rise in September, but in December as well. Yellen offered nothing that might bring those two camps closer together.
Or did she?
Personally, I suggest that behind the vagueness is a very specific intent. Yellen does not want to make the mistake made by her predecessor who, in 2013, sparked the so-called “taper tantrum” by being less guarded. Yellen, and other FOMC members, have been at pains to entreat the market not to worry the timing of the beginning of the tightening cycle, but of the timing of the cycle itself. The word they are yellin’ from the rooftops is gradual.
Which says to me they have every intention of implementing the first rate rise in September, and have done so for a while, so between now and then the clear intention is to play down the importance of that historical event in order to head off potential market volatility. Do not fear a little 25 basis point increase, they are saying, because the march back to “normalisation” from zero is a long one, and will be a very gradual one, but as someone once said, it must begin with the first step.
It may then be a second rate rise will not been seen this year, as the Fed hammers home this point and allows plenty of time for the dust to settle on the first hike.
Note that Fed policy meetings are held on a six-week rotation, not monthly like everyone else, meaning the only meeting between now and September will be in July. September is a quarterly meeting, meaning a press conference, and Yellen would not want to announce such a historical step without being in a position to field questions. The only reason a rate cut would not be forthcoming is if US economic data suddenly take a turn for the worse in between, and the June quarter GDP result proves a serious disappointment.
And just on that other source of potential market volatility, news just in is that Alexis Tsipras has organised an audience with Vladimir Putin on Friday night, after tonight’s eurozone finance ministers’ meeting. Clearly it is an attempt to gain some leverage with Europe, but then he has played the same fiddle before.
Ironed Out
The iron ore price pays little heed, if any, to US monetary policy. It fell another US$1.20 last night to US$60.90/t.
The LME pays no heed to Fed statements on the day of their release, because it closes beforehand. Thus last night base metal prices were relatively steady, moving slightly in either direction.
The oil markets “officially” close beforehand as well but continue on thereafter electronically, but little movement is evident anyway. West Texas is down US26c at US$59.81/bbl and Brent is down US3c at US$63.77/bbl.
Gold is the “commodity’ most impacted by monetary policy, and it’s up US$3.60 to US$1185.20/oz.
The US dollar is really the only financial instrument to have shown any significant response overnight, falling 0.7% on its index to 94.25 to imply forex markets read a dovish tone into the press conference.
The Aussie, nevertheless, is unchanged at US$0.7752.
Today
The SPI Overnight closed down 4 points.
New Zealand’s March quarter GDP result is out today. The RBNZ has already cut its cash rate this month of course, after previously hiking, proving yet again that central banks always go that one step too far.
An RBA Bulletin is out today but is unlikely to reveal anything new. It’s quarterly expiry day today on the ASX for SPI futures and index options, which can lead to some volatility.
The US CPI numbers for June are out tonight. The Fed doesn’t pay much attention to price inflation, preferring to assess the PCE (private consumption & expenditure) measure of inflation instead.
The fate of Greece will likely not be decided tonight as the eurozone ministers meet, but word is the EU is now preparing itself for a Grexit. A large crowd rallied in Athens last night in support of Tsipras’ defiance.
Rudi will make his weekly appearance on Sky Business' Lunch Money today, noon-12.45pm.
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