The Overnight Report (Thursday): The Greenback Growls

This story features ANZ GROUP HOLDINGS LIMITED. For more info SHARE ANALYSIS: ANZ

By Greg Peel

The Dow closed up 85 points or 0.7% while the S&P added 0.6% and the Nasdaq 1%.

The market recovered from an early low of down 57 to rally to a peak of up 93 before settling back at the death. The earnings lead-in was poor and the earnings results in the session were mixed.

Retailers Amazon and Starbucks had set a sombre tone in terms of the consumer economy with dour guidance released after the bell on Wednesday. Apple’s seemingly strong result failed to inspire as well. During the day further badly-accepted results came in for 3M (Dow component of Post-it Note fame) and Motorola. One interesting result was that of fast food chain Chipotle Mexican Grill which beat the Street handsomely and scored a 10% sales increase for the quarter. But the shares were slammed down 9% when the company suggested the second quarter would be a different story following soaring prices for corn, rice and beef.

On the positive side, a good result was posted by general insurer AIG (Dow) and a great result was posted by Ford. Surging sales into new markets offshore saved Ford from the dire local market and the shares shot up 12%, dragging General Motors (Dow) along with them.

The news on the economic front was also mixed. Much heart was taken from the weekly jobless claims number which fell 33,000 to 342,000 when consensus had a 3,000 rise pencilled in. But then March durable goods orders fell 0.3% for a third successive monthly drop.

The really bad news came from new home sales figures. March new home sales fell 8.5% to a seasonally adjusted 526,000 when economists had expected a number of 577,000. New home sales are now down 36% over 12 months and 62% from the July 2005 peak. Inventories of new homes completed fell for the twelfth consecutive month, which those looking for a silver lining took note of. However, this is hardly a surprise given the housing slump started two years ago. Reality is that the supply of new homes for sale increased to eleven months-worth, given demand has crashed for those new homes which are only “new” because they’ve never been sold, but one might say are getting “old” by the day. This is the highest level of supply since 1981.

These data were the catalyst for the Dow’s initial weakness, but they were soon forgotten. More was made of falling jobless claims (a volatile weekly figure) and the fact that the durable goods orders result would have been an increase if one ignored transport. The housing numbers, well…we’re all just so bored with those. Who cares if the housing situation is getting worse rather than better, forcing more foreclosures which will lead to more mortgage security write-downs and more lost earnings in the financial sector? Not Wall Street!

Wall Street is playing on the notion that the worst scenarios had already been priced into the financial sector at its nadir, and that the financial sector traditionally leads non-financials out of a slump. And so it was that suddenly the financial sector looked cheap on a greenback-flip.

For the last six months if there had been any notion the Fed would not cut rates then the market would have tanked big time. For the last few weeks all the talk has been of a US dollar that was sliding into oblivion on the back of unprecedented injections of liquidity from the Fed and a consensus that the Fed would cut to 1%. Well that all changed last night, apparently. Kicking off some dollar strength was a statement from ECB chairman Jean-Claude Trichet that a strong US dollar was necessary for a healthy global economy.

Trichet’s statement seems to have finally put paid to any suggestion the ECB might actually raise its interest rate to fight burgeoning inflation, despite the central bank’s previously hawkish tone. To top that off, a Wall Street Journal article published last night suggested the Fed would cut once more – by 25bps – and then that would be that (leaving the rate at 2%). The US dollar subsequently surged against the euro, dropping around two “big figures” to US$1.5688. The dollar was also strong against the other majors.

The US dollar rally was seen as a green light to buy financial stocks. Why? because if the Fed’s not going to cut then things simply can’t be that bad anymore. Wall Street subsequently piled into financials, pushing the sector index up 4%. The counter-trade was to sell commodities, and the materials sector. The Dow made its near 150 point turn-around on the rising dollar. If there had been talk the Fed wouldn’t cut rates again back in February, it would have been the other way around.

Thus the theme of “the worst is over” gains traction. Just don’t mention those housing numbers. Also helping the stock market to rally last night was, finally, a fall in the price of oil. Crude dropped US$2.24 to US$116.06/bbl. That oil fell on the same rally in the dollar that spurred on the stock market in the first place is not of consequence.

Goodbye gold. Down US$18.20 to US$886.60/oz.

The Aussie also copped it, falling close to a US cent to US$0.9399.

Base metals should thus, in theory, cop it too, but the real brunt was borne by recent record-breaker tin which saw some profit-taking, while aluminium broke and fell 3%. Lead was weak, but copper mostly hung in there given uncertainty surrounding the Chile situation and it, and friends zinc and nickel, were only slightly changed.

Despite the strength in the Dow the SPI Overnight lost 24 points. There is still another session tonight on Wall Street to influence the Australian market on Monday, but in the last couple of days the local market has traded independently, ignoring leads from the Dow. It’s been all about the specific stories in the local material and financial sectors. Late on Thursday ANZ Bank ((ANZ)) caused a stir when it announced another 10 basis points rise in its standard variable home loan rate.

This announcement took many by surprise, given (a) it came a day after the bank released it’s half-year result (why couldn’t it have made the announcement then?), and (b) seemed to contradict the ANZ CEO’s assertion that cost of funds had “stabilised”. Bank analysts would not have been all that shocked however, given it has been recognised the banks had yet to make up for lost margins. While a rise in lending rates will go some way to easing the margin pressure, the flipside is less demand for loans and the potential to push wavering mortgage holders and businesses over the edge into delinquency.

The ANZ announcement ensured the local market closed weak on Thursday. What was totally ignored by the local market was a 9% single-day rise in the Shanghai market following the cutting of stamp duty on Chinese share transactions. While this was understandably ignored given (a) the stamp duty cut only benefits locals (the Hang Seng managed only a 1.5% rally), (b) the Shanghai index has already fallen 40% this year, and (c) it was a tax rally, not an economic rally, it is ironic to note that back in February 2007 it was a 9% single-day fall in the Shanghai index that proved the butterfly that started the subprime tornado.

The lead-in to Wall Street’s session on Friday will be provided by results from tobacco giant Altria (good – up 1.2% in the aftermarket), plastic fantastic American Express (good – up 1.8%), and software monopolist Microsoft (bad – down 5%), all Dow components. (Actually no – Altria got the toss recently).

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