The Overnight Report: Snow Reason To Play

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By Greg Peel

The Dow fell 20 points or 0.2% to 10,038. The S&P fell 0.2% to 1068 and the Nasdaq lost 0.1%.

A snowstorm rolled into New York last night prompting traders to abandon their offices and head home quickly ahead of what is expected to be an east coast dump to rival that which shut down Washington last week. Volumes in all markets began to plummet into the afternoon.

Snow aside, it has become a waiting game on Wall Street as traders jump on every wire story coming out of Europe. The expectation now, according to French media, is that Germany and France will present a plan at tonight's European Union summit to bail out Greece and quash the feared Club Med contagion. Until more is known, markets are sitting tight.

There was nevertheless plenty of interest last night in Fed chairman Ben Bernanke's regular testimony to the House Financial Services Committee, or at least the speech Bernanke had prepared ahead of the sitting being called off due to snow. In it Bernanke provided greater detail with regards to the Fed's exit strategy from quantitative easing and accommodative monetary policy.

There was not, however, anything much in the way of new news, other than Bernanke suggesting the discount rate – the rate at which US banks can go to the Fed for emergency loans – will be raised ahead of the cash rate, when that eventually happens. Given the Fed still expects economic recovery to be slow in the US, there is little change to expectation that rates will remain low until mid-2010. But there was brief panic when the discount rate news hit the wires as Wall Street assumed a sudden change of policy, which eased when it was realised such a move is completely consistent with what one might expect in the process of very gradual tightening.

After a big move up yesterday, Wall Street opened to the downside with the Dow falling almost 100 points from the open to again be below 10,000. Economists had been expecting the December trade balance to show a US$36.8bn deficit following a US$36.4bn deficit in November, so a deficit of US$40.2bn was disconcerting.

If the US is going to wind back its twin fiscal and current account deficits then it needs to sell exports and stop buying imports. A blow-out in the trade balance is the opposite result. Americans are nevertheless being encouraged to spend and help drag the US economy back on its feet. But it won't help if all they buy is imported goods. The elephant in the room, however, is America's total reliance on foreign oil. On the flipside, China wants the West to start buying imports like it used to.

The early weakness did not last long once the media reports hit speculating that Germany and France had hatched a Greek rescue plan. Stock markets rebounded pretty much to the flat-line. Now we wait.

The US dollar index similarly rose and fell back again to 80.01 over the same time frame, such that base metals closed relatively unchanged in London and gold slipped US$8.00 to US$1068.70. The Aussie slipped back a bit to US$0.8750.

There was a bit more action in the oil market, which saw crude close up US77c to US$74.52/bbl despite a slightly stronger US dollar.

The US Energy Information Agency released a report last night suggesting the world oil market should gradually tighten over 2010-11 as the global economic recovery played out. This is hardly a scoop one would think, but traders were happy with predictions of oil in excess of US$80/bbl in the second half of 2010. In the meantime, the release of weekly oil inventory data was delayed to Friday because of, yet again, the snow. Clearly the snowstorm is impacting on short term energy prices but it's a trade-off. Heating oil and natural gas demand is soaring but no one's driving anywhere. There is currently a surfeit of stockpiled natural gas reserves so that spot price is not running away either.

The other consideration is that Iran has now supposedly reached a new milestone on its path to uranium enrichment, effectively waving warheads in President Obama's face as he desperately tries to pull out all the non-military stops.

After a lacklustre response to Tuesday's three-year Treasury note auction, attention turned last night to the auction of US$25bn of bellwether ten-year notes. Demand was poor, but aside from the impact of Bernanke reinforcing his monetary policy tightening plans consideration was once again given to empty chairs on Wall Street. Foreign central bank participation nevertheless fell rather alarmingly to 33.2% compared to the recent average of 40.2%, which one presumes has nothing to do with New York weather. The yield on the ten-year closed up 5bps to 3.69%.

Despite a slightly weaker Wall Street, the SPI Overnight rose 14 points or 0.3%.

It's unemployment day in Australia today, and in theory there should also be releases on Chinese inflation. Rio Tinto ((RIO)) and Telstra ((TLS)) are reporting, along with James Hardie ((JHX)), Paladin Energy ((PDN)) and a handful of others.

Please note that while FNArena will continue to publish an Overnight Report on Friday night's markets, that report will no longer be available on Saturday morning. Such a service was a GFC special, and from now on the Friday Overnight Report will be incorporated as part of The Week Ahead, published as always on Monday morning before the open in Australia.

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