The Overnight Report: A Hollow Victory

This story features COMMONWEALTH BANK OF AUSTRALIA. For more info SHARE ANALYSIS: CBA

By Greg Peel

Legend suggests that when a team from the old National Football League, (now the NFC), beats a team from the old American Football League (now the AFC) in the Super Bowl, it will be a bullish year for stocks. Don’t laugh – this indicator has worked 85% of the time. As it was, victory for the New York Giants over the New England Patriots thus signalled a positive 2008.

Not that you’d know that from the Dow’s reaction last night. Following the 4% gains of last week – the best week in many years – Wall Street gave back some ground last night. The Dow lost 108 points or 0.9%, while the S&P lost 1% and the Nasdaq 1.3%.

The falls came despite some good news on the economic front, with December factory orders having grown 2.3% against 2% consensus expectation and 1.7% in November.

It’s no great surprise, however, that Wall Street should have taken a breather. On the Nasdaq, the euphoria settled back a bit from the extraordinary Microsoft-Yahoo announcement. Microsoft had initially indicated Yahoo was not its only option for takeover, sending all possible contenders higher. It has since been decided Yahoo is really the only one, and so while Yahoo shares have pushed towards the bid price everything else fell back.

In the financials sector, two pieces of news were detrimental. UBS downgraded American Express from Buy to Sell, and warned about all credit card companies. UBS is expecting US unemployment to grow from 5% to 6% and for credit card defaults to rise commensurately.

The other loser was bond insurer Ambac. The New York regulator in charge of rescuing Ambac, along with the assistance of a handful of banks, announced that the ultimate bail-out package would only involve certain debt sectors, such that while municipal bonds would be saved, CDOs wouldn’t. Moody’s has already downgraded yet more CDOs, possibly leading to more bank write-downs. The Ambac package, while a relief on the muni front, is no longer quite as exciting.

President Bush announced his last budget – a record in excess of US$3 trillion. The short term effect will be to take the US deeper into deficit, as tax cuts, the tax relief package, and another big increase in military spending will fail to be offset by spending cuts in unimportant areas such as healthcare.

Traders are concerned the recent rally on Wall Street lacks conviction. It still has an air of more short covering than fresh buying. Breadth is poor, with only a handful of sectors such as financials, retail and builders, and techs over at the Nasdaq, being the ones in play – whether up or down on the day. Everything else seems to be off on the sidelines at present.

The factory orders number at least gave the oil market something to be happy about, as it supposedly is a non-recessionary result. So oil bounced back US$1.06 to US$90.02/bbl, having fallen over US$2 on Friday’s jobs data. This is the current status of oil – banging around the US$90/bbl mark looking for direction. One day up, next day down on that day’s data.

The US dollar slipped against all currencies except the yen, after Europe posted a strong PPI growth number for December. Traders have been beginning to anticipate the ECB may simply be forced to cut its rate, and thus put a floor under the dollar. But more bad inflation news only reinforces Trichet’s fears, and suggests the ECB will still stay fast. The Aussie crept higher to US$0.9092, while gold bucked the trend and continued its consolidation, losing US$5.00 to US$902.90/oz.

Base metals in London mostly range traded last night on mixed news, but very late in the session copper jumped when it was learnt Chile had experienced an earthquake, centred 100 miles from one of its big copper mines. No damage was reported at the mine, however.

Australia had a scare yesterday, when a 3% rally evaporated over the afternoon. The SPI futures had indicated a big opening, and Asia posted some big gains on the day, led by Shanghai up 8%. But an announcement from Commonwealth Bank ((CBA)) spooked the market, and all the banks took a hit. (See “CBA Tanks On Accounting Changes”; late yesterday).

Under the new RBA scheduling, the board will meet this morning to make its interest rate decision and then announce it at 2.30pm AEST. (Before we had to wait until 9.30am Wednesday). The world and his dog believes the RBA will raise by 25bps. It’s hard to see this having a direct effect on markets of any magnitude, given it has been expected for some time.

The SPI Overnight lost 69 points.

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