The Overnight Report: Bull Market Resumes?

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By Greg Peel

The Dow closed up 217 points (back above 17,000) or 1.3% while the S&P rose 1.5% to 2023 and the Nasdaq jumped 1.8%.

Flash Boys

Yesterday’s intraday chart of the ASX200 is an interesting one. At 11am the index was up only by single figure points and at 12.30pm it was up by only single figure points. But at 11.38am it was up 40 points. What happened in between? The ABS released the September jobs numbers.

Ahead of the release, the ASX200 suddenly took off, then retreated, then took off again. At 11.30am the ABS announced a 0.1ppt fall in the unemployment rate to 6.2% and the index shot up to its high. But the drop in unemployment was due to a rise in participation, and September saw a net reduction in jobs when economists had expected an increase. Down we came in a hurry, back to where it all began.

At that point the call went out: If you flash boys are finished having your fun then perhaps you’ll now let the grown-ups take over the session.

The index then rallied in a steady trend to a close of up 32 points. The high frequency traders were left to mull over their algorithms.

In Wednesday’s session we saw the release of weak Chinese inflation data, which yet again confirmed fears of a slowing China. Energy – the market’s current plaything – was carted. On Wednesday night oil prices closed little changed. Yesterday the energy sector rallied 1.7%, outstripped only by materials, which saw 1.8%. Next best was consumer discretionary, on 1.1%. Notwithstanding the broad spectrum of businesses that fall under the “industrials” banner, these three sectors have the clearest connections with China.  

Yesterday’s rally, we may assume therefore, which defied a fall on Wall Street, is all about expectations of fresh Chinese monetary stimulus. Maybe as early as this weekend.

And we’re still playing the technical trade. Wednesday closed just under what is now solid support at 5200. This is now a springboard for buyers.

Lower for Longer

As the period 2009-2014 attests, the greatest beneficiary of low, or zero, or even effectively negative (QE) interest rates, are asset prices – property and equities. Not business investment, as is the intention. The S&P500 bottomed out, famously, at 666 intraday at the depth of the GFC and thanks to Fed QE, which finally “tapered” off last year, 2015 saw a high of 2134.

All through 2015 the discussion has been whether or not the first Fed rate rise will cause a major sell-off. Well we had the sell-off, and not the rate rise. And now Wall Street has come to the conclusion that there simply will not be a rate rise in 2015, and maybe not even early in 2016. October is famously “the month for bottoms”, and November-December typically brings us the famed “Santa Rally”. Certainly this has been the case over the past, QE-driven six years.

Last night saw September CPI data released in the US. The headline CPI fell 0.2%, mostly due to another dip in oil prices. The annual headline rate is zero. The core (ex food & energy) CPI rose 0.2% for an annual rate of 1.9%, basically where it’s been sitting for the past few months. Wages grew a paltry 0.1% despite a US unemployment rate of only 5.1%. Annual wage growth is tracking at a modest 2.2%.

In other data, both the Empire State and Philadelphia Fed activity indices saw improvement for the month, but both remain in contraction.

These weak data releases follow on from Wednesday night’s sombre retail sales result, soggy Fed Beige Book and a profit warning from retail leviathan Wal-Mart. On Wednesday night Wall Street sold off on the realisation the US economy is not picking up pace into the December quarter as previously expected. But last night that weakness completely reversed.

On Wednesday night shares in JP Morgan and Bank of America sold off. JPM posted an earnings miss and BofA’s result failed to inspire. Last night Citigroup posted a beat, but only because it didn’t have to fork out any more hefty fines and legal costs relating to the GFC. Goldman Sachs missed. So as one might expect, last night Wall Street piled into the financials sector, and it led the main indices higher.

Sorry? They also piled into heavily beaten-down biotechs, which is why the Nasdaq rallied strongly. It would appear that last night the Santa Rally began. It’s early days of course, but (a) everyone has been expecting a Santa Rally, so might as well get in early and (b), if anything’s going to fuel the Santa Rally, it would be a lower for longer Fed interest rate.

The US financials sector typically leads a bull market. Or looking at it another way, you can’t have a bull market without the financials sector being involved. Last night’s seemingly contrarian activity on Wall Street appears to have signalled the end of will they/won’t they Fed speculation. Perhaps the CPI was the one last piece of the puzzle needed. History shows that zero interest rates are positive for stock markets.

Commodities

And it’s a global phenomenon. The US dollar index bounced back 0.5% last night to 94.43 despite last night’s data hardly being encouraging, but it was more talk in Europe of further ECB stimulus that dragged down the euro and thus pushed up the greenback.

The balance of a higher dollar and stimulus talk left base metal prices mixed on the session in London, with aluminium’s 1% fall the standout amongst otherwise small moves in either direction.

Iron ore dropped US$1.10 to US$53.20/t.

The oils were gain relatively quiet. West Texas rose US23c to US$46.86/bbl and Brent, on the expiry of its November delivery contract, fell US44c to US$48.71/bbl.

Gold fell back US$4.10 to US$1182.90/oz.

The Aussie initially plunged on the local jobs data yesterday but has since rallied back and is actually up 0.4% at US$0.7333 over 24 hours despite the stronger greenback.

Today

The SPI Overnight closed up 40 points or 0.8%.

The RBA will publish a Financial Stability Review today. Tonight sees CPI data in Europe, and the US will see industrial production and consumer sentiment numbers.

Rio Tinto ((RIO)) will release its quarterly production report today.

Over the weekend, all eyes will be on Beijing. The Chinese government seems to favour Sunday policy announcements. If there is no announcement, there will be the potential for this early Santa Rally, if that’s what it is, to derail. We’ve seen at least one big Beijing disappointment sell-off earlier this year. Although Beijing did respond fairly promptly thereafter.
 

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