The Overnight Report: Treading Water

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By Greg Peel

The Dow fell 13 points or 0.1% while the S&P lost less than a point to remain at 1138 (albeit failing to mark a seven-day rally) and the Nasdaq added 0.3%.

Arguably the biggest news story of the day over in little old America came from across the Pacific in the global economic powerhouse that is Australia. Wall Street was all a-chatter about the combined PetroChina-Royal Dutch Shell bid for CSM LNG aspirant Arrow Energy ((AOE)).

While Wall Street is fully aware of US involvement in the Australian energy industry via the likes of Chevron and Conoco Phillips (the latter is also involved in Queensland CSM via its deal with Origin Energy ((ORG))), the deal was touted as a wake up call for America as it lets the energy resources of a strong ally slip through the net to Dutch and Chinese interests. It is in America's strong interest to diversify its energy sources away from its enemies.

CNBC, in particular, suggested the Arrow deal would re-rate LNG as an energy source but while indeed true, what is not being recognised is that Australian LNG companies have been undergoing a re-rating process for the last two years. Such a view also fails to recognise that analysts expect the rapid growth of the US shale gas industry will in fact undermine the value of CSM LNG-for-export over the course of the next five years.

In the meantime, the US benchmark natural gas price continues to drift lower in contrast to the rising crude oil price. Given obvious interchangeability of oil and gas, the oil/gas price ratio traditionally trades at an average of about ten times. At present, that ratio has blown out to 18 times. Last night the natgas price drifted lower again as a burst of warm weather arrived to melt the twenty feet of snow over much of the east coast, which understandably reduces heating demand. But natgas failed to rally in the cold snap either due to extensive US stockpiles.

Yet there are also huge stockpiles of crude oil in the US present, a lot of it owned by hedge funds. Oil is a lot easier to store than gas. But Nymex traders tend to ignore this reality, rather seeing oil as an inflation trade and the first cab off the rank in any global economic recovery. And China is discovering the car.

The sudden warm weather may have been the latest excuse for traders to stay away from Wall Street, a possible explanation for why last night's NYSE volume was nothing short of pathetic. But having re-rated the stock market on Friday for the positive unemployment news it seems no one's particularly keen to lead off the next upward leg. Perhaps the VIX volatility index is in the back of quite a few traders minds. The VIX has now fallen to 17 – well into the supposed “complacency” zone – and the last time it was at 17 was in May 2008 after the Bear Stearns rescue had many believing the credit crisis was now over. Lehman was yet to come.

There were no economic releases in the US last night which clearly added to the lack of interest. There are no releases of note tonight either but the latest round of longer dated Treasury bond auctions will begin.

Any inclination for Wall Street to drift off last night following Friday's big gain was stymied by another foreign asset sale from troubled AIG to net US$15.5bn, and a 4.8% February increase in same-store sales for US consumer staple McDonalds, based almost entirely on foreign arches.

The US dollar index finished the day roughly square at 80.41. It had fallen earlier in the session on an easing of fear when French president Nicolas Sarkozy broke ranks and suggested the eurozone stood ready to help Greece avoid default. To date the finance ministers of France and Germany have denied they have any contingency plan, preferring to let the world believe the latest Greek austerity measures provide confidence enough. (And at the same time avoiding any backlash from their own electorates.)

But the US dollar drifted back up again and that sent gold into a bit of a disinterested tumble, losing US$11.20 to US$1121.00/oz. Base metals were mixed on small moves with the exception of lead (up 2%).

Oil also went up and down on the dollar, finishing up US37c to US$81.87/bbl.

The Aussie was up a few more ticks to US$0.9093.

The SPI Overnight was up 7 points.

Tonight in the US is the anniversary of The Beast. One year ago the S&P 500 closed at 666 and thereafter began the 2009 rally.

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