The Overnight Report: And the Train Kept A’Rolling

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This story features BHP GROUP LIMITED.
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By Andrew Nelson

The Dow climbed 78 points or 0.8%, the S&P 500 was up 0.56% and the Nasdaq picked up 0.72%.

After two-straight weekly declines the Dow advanced four of five days this week and the Nasdaq made it five from five. A promising start to the Q3 earnings season has played a part, while the RBA’s move earlier this week to tighten the Australian interest rate signalled to many investors the world over that the global economy is on the road back to normal.

The day was a notable anniversary for Wall Street, as it was two years to the day that both the Dow and the S&P 500 finished at their all-time closing highs. While both of those gauges are currently about 30% below that level, they’re also about 50% higher than the lows reached back in March.

To celebrate the day, the Dow, Nasdaq and S&P 500 pushed to fresh 2009 highs as investors lapped up a surprise drop in the trade gap and a stronger US dollar.

The US trade deficit narrowed to US$30.7bn in August from a revised US$31.9bn in the previous month. It was a big and positive surprise, given the market was expecting the deficit to widen to around US$33bn.

The report from the US Commerce Department showed that exports rose, adding some much needed support to the belief that the US economy is recovering. The drop in imports was also a surprise, with many believing higher oil prices would have had a more significant negative impact on the number.

The US dollar gained versus the Aussie, euro and yen, and also reversing its recent slide against a broader basket of currencies on the back of comments from Fed Chairman Ben Bernanke yesterday evening. The Federal Reserve Chairman confirmed that the US central bank would look to tighten monetary policy as the economic recovery takes hold. He made a special mention of interest rates, pointing out that they will begin to rise when the economy “has improved sufficiently.”

Not only did the comments send the US dollar higher, with the US dollar index up 0.56%, but gold was quite understandably lower after yesterday’s strong run on the commodities market. Commodities had been running hot for a couple of days on US dollar weakness, with the greenback hitting a 14-month low on Wednesday on worries that US policy makers weren’t working hard enough to support the greenback.

Yet while gold futures finished lower on Friday, they finished the week sharply higher, with today’s move south doing little to reverse this week’s better than 4% gain. Over the course of the day, the price retreated US$7.70 to $1,048.70.

Meanwhile, oil slumped in early trade, also pressured by the stronger dollar, but oil is just as much an economy play nowadays as it is a dollar trade and optimism over the improving economy dominated after the trade deficit read. Also helpful were comments from the International Energy Agency, which raised its forecasts for global oil demand for both this year and next.

By the end of trading, crude oil for November delivery was up 8c, or 0.1%, at US$71.77 a barrel, climbing 2.6% from last Friday’s close.

On the other hand, base metals were lower in London, mostly in response to the stronger dollar. Yet the losses were light, with the complex looking to consolidate the run up it has enjoyed over the preceding few days.

The drop in commodities took a minor toll on stocks in the sector, with  BHP Billiton ((BHP)), Freeport McMoran and ExxonMobil all losing a little ground. However, Chevron shot almost 2% higher, and was close to leading the Dow pack, after the company said it expects third-quarter earnings to be significantly higher than the second quarter, helped by higher crude prices and gains from asset sales.

But it was IBM that was the biggest contributor to the Dow’s advance, with the stock up better than 3% after Barclays analysts put out some bullish comments and raised their target price to US$140 a share from US$119 a share.

Taking its lead from IBM, the broader technology sector, which generates the biggest share of its earnings overseas of any S&P sector, led the market’s gains Friday. While the sector was no doubt helped by the strong export data, it really started hopping after Deutsche Bank raised its forecast on the semiconductor industry for the rest of the year. UBS also weighed in on the topic, saying it thinks chip giant Intel could surpass its Q3 sales forecast, based on recent checks.

Next week, however, will be the tale of the tape for the Q3 earnings season, with the reporting calendar dominated by many of the large financials. Firms including J.P. Morgan Chase, Citigroup, Bank of America and Goldman Sachs Group are all reporting.

In other news, US President Barack Obama won the Nobel Peace Prize Friday for his efforts in strengthening cooperation around the world and trying to reduce the usage of nuclear weapons. The announcement came straight out of left field, with Obama’s name not even garnering a mention in the run up as a possible contender for the prize.

Global markets were mixed. In Europe, London’s FTSE 100 was barely changed, while France’s CAC 40 lost 0.2% and Germany’s DAX was a tick lower as well. However, Asian markets ended higher yesterday.

After a winning run though the course of the week, Australian traders have carried the momentum into the weekend, with the SPI overnight trading 34 points higher to 4783.

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