The Overnight Report: Nice Windows

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By Greg Peel

The Dow closed up 235 points or 1.5% while the S&P gained 1.9% as the Nasdaq jumped 2.3%.

All Dressed Up

Question: if the Dow is up 1.5% overnight, why are the SPI futures only up a single point this morning?

The answer is because futures traders are likely writing off last night’s rally on Wall Street as end-of-quarter window-dressing and short-covering, just as was the case in Australia yesterday.

While we might argue that having reclaimed the correction low, and Wall Street not falling out of bed on Tuesday night, the local market was ripe for a rally. But if we note that the sectors that led the charge yesterday were all the sectors that have been beaten up over the past three months, we can’t really read much into yesterday’s performance as far as October is concerned.

The ASX200 finished the quarter down 8%, and down 20% from the June quarter high. Yesterday saw the banks, telco, materials and consumer staples all posting near equivalent 2.5% rallies while all the other sectors posted lesser performances. We would have likely seen energy joining in as well were it not for Origin Energy’s ((ORG)) announced capital raising.

Technically, it was interesting to note yesterday that the ASX200 did jump sharply from the open, but came a cropper at the familiar level of 5000. It appeared that previous solid support was now going to revert to resistance. We came all the way back to 4950 by midday.

The buying nevertheless then resumed, possibly with assistance from news of a surprise jump in Westpac’s China consumer sentiment index. It rose to 118.2 from 116.5 in August to mark the highest level in over a year, at only 1.7% below the long-run average. Interestingly, only 11% of those surveyed were invested in the stock market.

Aside from confirming the minimal connection between the Chinese stock market and the Chinese economy, the survey does suggest Chinese consumers are heartened by Beijing’s various stimulus and reform measures.

The ASX200 began to drift back up through the afternoon but it was the three o’clock wave that took the index back through 5000 without a hitch on the second attempt. To be back above that support level is technically positive, but we can now tear off the sheet that was the September quarter and start with a fresh page for October. Apart from October carrying its typical stigma, today sees the release of China’s PMIs and they will likely determine whether this scary month starts off with a bang or a whimper. Then China goes on holiday for a week.

Job Countdown

Wall Street similarly enjoyed a window-dressed session last night after posting around 7% falls for the major indices over the quarter. There was some good news, nonetheless, for fans of the “Just Do It” brigade.

ADP announced the addition of 200,000 new private sector jobs in the US in September when economists had forecast 190,000. While not always a strong correlation, Wall Street is setting itself for a similarly positive non-farm payrolls number tomorrow night.

So we could say there was an element of “good news is good news” in Wall Street’s rally last night.

Over in Europe, QE rules, which means “bad news is good news” still prevails. Last night’s flash estimate of the eurozone’s September CPI showed headline inflation has fallen back into deflation, at an annual minus 0.1%. Economists had expected a drop to 0.0% from August’s plus 0.1%.

The drop in inflation reflects oil prices, and indeed the eurozone’s core inflation measure is steady at 0.9%, but Mario Draghi has insisted the ECB will do whatever it takes to revive the European economy and deflation suggests he will be extending the central bank’s QE program in due course. The euro thus fell last night, and the European stock markets were all off to the races.

This sentiment flowed over the pond, and ensured a positive start in New York. Like the Australian market yesterday, the US indices lost steam mid-session but powered home in the last couple of hours. Of particular note was the biotech sector, which has been creamed this past week or more. It rallied back strongly, no doubt helped by short-covering, and hence the Nasdaq posted a 2.3% recovery.

Commodities

The same game was evident in London. But for LME traders, there was an added incentive to square up ahead of the week-long Chinese holiday. If the LME were Wall Street then copper would be the biotechs, and it rallied back 3.4% last night. Nickel is another metal that’s been hit particularly hard, and it jumped back 4.6%, while zinc has also had a tough time of late, and it put on 1.5%.

There were no such shenanigans in Singapore, where iron ore fell US30c to US$54.40/t.

The oils each jumped just over US50c, to US$45.35/bbl for West Texas and US$48.52/bbl for Brent. WTI began the quarter at US$60 so it’s had a 25% hammering, although the price has been stuck like glue to the US$45 level for all of September, but for some sharp ups and downs.

That strong ADP jobs number is another nail in the coffin for gold, if a Fed rate rise is what will kill off the yellow metal. Gold is down US$12.40 at US$1115.30/oz.

The US dollar index is up 0.3% to 96.23 on euro weakness but the Aussie is also up, by 0.4% to US$0.7013.

Today

As noted, the SPI Overnight is up a whole one point. Bridge Street will probably do very little this morning ahead of the Chinese PMI releases around midday.

Otherwise, China is now closed until next Wednesday for Golden Week.

China’s is not the only manufacturing PMI we’ll see over the next 24 hours, with Australia, Japan, the eurozone, UK and US all reporting, but it’s the only one that matters at this point.

Rudi will make his usual appearance on Sky Business' Lunch Money today, midday until 1pm.
 

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