The Overnight Report: Not Convincing

This story features NEWCREST MINING LIMITED. For more info SHARE ANALYSIS: NCM

By Greg Peel

The Dow rose 105 points or 1.1% while the S&P gained 1.0% to 1078 and the Nadaq added 1.4%.

The importance of Australia's place in the world, whether rightly or wrongly, was emphasised last night on Wall Street. There was much talk of Australia's yet again surprising jobs numbers. The fall in unemployment from 5.5% to 5.3% in Australia, when a 5.6% result was expected, now has economists ready to believe unemployment has peaked downunder. As evidenced by the 5.6% consensus forecasts, they had not been prepared to concede just yet.

It is extraordinary to recall that earlier this decade a level of 5% unemployment was considered “full” employment in Australia. This was deemed to be the level of greatest comfort. If you don't have 5% of workers “on the bench” to fill positions as they arise then you are heading towards inflationary pressure. This is what happened prior to the GFC when Australia's unemployment rate fell into the low fours. This was the dreaded “skills shortage”. This was when the cash rate hit 7.25%.

On the flipside, the higher unemployment rises above 6% the less spending power there is in the economy, and the greater the welfare drag. In the recession of 1992, unemployment hit double digits. It is no wonder all and sundry assumed the same would happen as a result of the GFC.

But it hasn't, and indeed a figure of 5.3% is almost a level of comfortable equilibrium. Things are not quite as rosy in the US, but the recent fall from 10.0% to 9.7% when 10.1% was expected was also a confidence booster. Then last night the weekly new jobless claims number indicated a fall in claims of a much greater than expected 43,000.

There was some effect from California catching up with its figures, but a fall in the monthly average of those claiming benefits to 468,000 compared to 540, 000 in October is evidence of a trend heading in the right direction.

Wall Street needed these jobless claims numbers last night, and indeed it needed to feel good about the “model” economy across the Pacific. Someone once said “yes we can”. He need only point south for evidence.

Australia's economic recovery is seen as indicative of the China effect. Yesterday China released trade figures showing imports of commodities were strong. Solid profit results from Australia's two big diversified miners have reinforced that point. Wall Street needed to know that the Chinese economy can still, in theory, save the world.

For there was little solace provided by the much anticipated news out of Europe last night. The EU pledged to support Greece, but it provided little detail of exactly how that would be achieved. Instead the EU suggested it would let the Greek budget-slashing austerity package play out, and closely monitor it. Meanwhile Greek workers took to the streets of Athens in protest over the same package.

The EU, or Germany and France in particular, has not suggested any wholesale buying of Greek government bonds. Commentators are assuming some form of low interest rate loans will be forthcoming. In the meantime, Greece's banks have been ostracised such that no other European banks will lend to them. This is exactly the sort of cutting off of credit lines that suddenly brought down Lehman. But all across Europe, banks are exposed to Greece, particularly via our old friends credit default swaps.

In early New York trade, the euro was sold heavily and the US dollar index made its biggest jump in three weeks, to 80.50. The Dow was down 60 points at the open. But then the jobless claims number came out and attention quickly turned to the US economy, and indeed the Australian economy, rather than the old-world European economy. Buyers emerged and a short-covering rally ensued.

Most interesting was the response in base metals. For as London was closing the US dollar index had retraced its gains as the stock market rallied and returned to 80.00 where it began the session. Yet short-covering in base metals triggered technical buying that saw copper surge 4.5%. Aluminium was up only 1.5%, but the rest of the metals enjoyed 3-4% jumps.

Oil put in a similar performance, rising US76c to US$75.28/bbl.

Gold had a stellar night, because the market had feared that whatever rescue package was decided on for Greece, it would involve the sale of European central bank gold reserves. As there was no mention, gold rose US$25.60 to US$1094.30/oz.

There was no good news in the US bond market, however. Like the ten-year bond auction on Wednesday, last night's thirty-year auction was poorly received and featured only 24.1% foreign purchases compared to a running average of 39.8%. There were rumours flying around Wall Street that one surprisingly big domestic buyer was actually the government, in the form of the infamous Plunge Protection Team.

This clandestine entity, the existence of which no one's ever really quite sure, has also recently been accused of providing surprising late market stock buying on various occasions as well. Let's just say that it is the stuff of conspiracy theories at this point.

The rally on Wall Street was not a convincing one. It was if Wall Street was simply trying to convince itself. Good news from China, Australia and the local jobs front was selectively acted upon, while thoughts about what could really happen in Europe were best not considered for now. Volumes were stunted by low attendence due to the weather.

The SPI Overnight rose 40 points or 0.9%.

Today in Australia sees results from Leighton Holdings ((LEI)) and Newcrest ((NCM)). 

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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