The Overnight Report: Thin And Volatile, But Up

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By Greg Peel

Those who understand the game of rugby union will appreciate that the US equity markets have moved from a 15-man test series to an interim round of Sevens. There’s action all over the field but only a handful of players. The rest of the squad is currently sitting it out on the bench, waiting for a sign from the coach that it’s time to go back to the real stuff.

The Dow closed up 54 points, or 0.4% last night having been down 30 early and up 122 at lunch. The S&P also rose 0.4%, while the more volatile Nasdaq posted a healthy reversal to jump 1.3%. Some M&A activity among tech stocks was the good news on Times Square.

The session opened with a round of very weak March same-store sales numbers from retailers. However, while the numbers themselves were worse than expected the market is no longer surprised. Thus it was a case of buy the fact, given (a) retailers have been trashed within an inch of their lives and (b) Wal-Mart actually increased its first quarter guidance following a 0.7% SSS rise. Wal-Mart is like Woolies and K-mart put together, and as such is the classic defensive non-cyclical retail play.

On the economic data front, the US trade deficit blew out another 5.7% in February. Usually such blow-outs are attributed to Middle East oil imports and cheap imports from China but this time it was different. This time the big moves were in food, industrial supplies, and capital and consumer goods. The Fed will no doubt be wary – the board’s growing inflation fears are playing out. This reduces the likelihood of further massive cuts and brings forward the chance of hiking before too long.

Thus the US dollar rallied last night, spurred on by a 25 basis point cut in the Bank of England’s cash rate to 5.00%. As expected, the ECB left its rate unchanged at 4%.

Welcome news came from the weekly jobless claims, which actually fell 53,000 to 357,000 following a big rise last week. The monthly average is an increase of 2,500 to 378,250. Economists consider a number over 400,000 to be recessionary, so despite the volatility of the weekly numbers the signs are supposedly that employment is hanging in there. Mind you, employment numbers are one factor that lags significantly.

This news helped to send the Dow running, and another boost was added when one analyst upgraded Intel to Buy. Chip-makers have been in the deep fryer of late, so this news was another fillip for the Nasdaq surge. There’s also supposedly now a battle going on for Yahoo between a Time Warner-AOL team in the red corner and a Microsoft-News Corp ((NWS)) team in the blue. The market’s not particularly enthused however – Yahoo shares are still trading under the level of the Microsoft bid already on the table.

One sector not to share in whatever spoils there were last night was our old friends financials. Ahead of next week’s official results it was revealed Lehman Bros was forced back in February to liquidate three funds to the value of US$1bn and purchase another US$800,000 of distressed assets from other funds, all of which now sit on Lehman’s books. Old news perhaps, but enough to ensure financials remain friendless at present.

After big jumps yesterday both oil and gold drifted off on a higher US dollar. Oil fell US76c to US$110.11/bbl while gold fell US$5.60 to US$928.90/oz.

Base metals prices saw a bit of profit taking after an early run that saw the official London closing price of copper hit US$8884/t – above the previous closing high of US$8820/t. However the stronger US dollar was enough to halt the break-out and copper fell later in the session and consolidated back at base camp – not quite yet ready for the final assault. All metals slipped a bit.

(Of course, the more we keep talking about this supposed copper break-out the less likely it is to happen, but let’s not get cynical.)

The SPI Overnight fell an entire one point. Yesterday the ASX 200 wasted no time in breaching the 5500 support level, and having done so fell heartily. Apathy in the futures market overnight suggests a 50 point rise in the Dow will not provide any impetus to break back through today. The ceiling is 54 points above.

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