The Overnight Report: Two In A Row

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By Greg Peel

The Dow closed up 5 points or 0.04% while the S&P gained 0.4% to 1102 and the Nasdaq shot up 1.0%.

It was the first time the Dow has put together two consecutive up-days since April, but more definitive strength in the broader market indicators helps overcome the fact 5 Dow points is hardly something to write home about. And it is the S&P 500 which provides Wall Street with its most robust indicator.

While the Dow has managed to bounce off the psychological 10,000 mark, we are now at a critical point for the S&P. Last night the index touched 1105 before settling back at 1102. While 1100 is a nice round number, 1105 currently represents the 200-day moving average. As the following graph shows, the 200MA has been acting as a support level until recently when a breach meant heightened fear and a VIX over 40. But now that we have consolidated somewhat, the 200MA becomes resistance. If the index can push through, Wall Street will breathe a big sigh. All things being equal, tonight's jobs number will be crucial.

Local economic data have been a bit lost in the wash of more macro global factors this past month or so, but as the situation in Europe is now tentatively stable the focus can return. And so it was that mixed data on both sides of the Atlantic last night were drivers of a choppy session – one in which the euro ultimately fell lower but Wall Street remained defiant.

With economists hoping for 500,000 new jobs to have been added in the US in May, the ADP private sector-only report released last night was a disappointment. Economists had expected 75,000 new jobs, but only 55,000 were registered.

Major US chain stores had mixed same-store sales results in May, albeit the net rise in sales of 2.6% was about in line with expectation. But given that the annual trend is currently 3.8%, the number was still generally disappointing.

April factory orders also missed the mark, with a 1.2% gain falling short of 1.7% expectation. Taking out volatile and lumpy aircraft orders meant a fall of 0.5%.

The ISM service sector index for May held steady at April's level of 55.4. This was considered a little downbeat given 56.2 was expected, but 55.4 is still expansionary and no slouch of a number.

It was lack of excitement in these numbers which had the Dow down 74 points at lunchtime. But the buyers were defiant, and the indices grafted their way to a positive close.

Over in the eurozone, economists had expected April retail sales to rise by 0.1% but they fell by 1.2%. The eurozone service sector index also came in a bit weaker than expected. So in a battle of the transatlantic economic data, the US won. The dollar index rose 0.5% to 87.23 and the euro fell 0.7% to US$1.2162 – again staring at previous lows.

Not helping the euro either was the EU's rejection of an appeal by Hungary to maintain a wider budget deficit. Now before you say “OMG, not Hungary too now!”, it must be noted that Hungary is an EU but not eurozone member, and that the former eastern bloc nation's deficit difficulties have long been a story even before the proverbial hit the fan in western Europe. Yet while it is not particularly “new news”, a nervous market is not going to wait around to find out.

The interesting point of last night's trade on Wall Street is that stock markets defied the euro slide, and moreover defied a turnaround 1% drop in the risk indicating euro-yen. A couple of weeks ago things would have been different. I think Wall Street is coming to realise that European authorities are happy to let the euro devalue but stand ready to cancel out excess volatility. A lower euro is better for European exports and thus budget deficit reduction.

Someone should tell that to the London base metal markets, because the headless chook commodity funds were simply playing “sell on dollar strength” last night and triggering more “technical” selling – quite violently so. There are no true physical market participants in the pit at present. Metals were hammered but found some recovery at the death. Copper, lead, nickel and zinc were down 2-4%.

The true market participants are nevertheless reticent to enter the market as we approach the seasonally weak demand period of the northern summer.

Gold also took a tumble last night on dollar strength. If Wall Street can rally while the euro is falling then weaker gold positions will be asking themselves “why am I here?”. Gold has struggled to overcome resistance at its previous highs so patience was lost last night and gold fell US$16.20 to US$1207.80/oz. Support lies above the US$1200 mark.

Oil nevertheless defied the dollar, rising US$1.75 to US$74.61/bbl. It was all about weekly inventory numbers which showed larger than expected falls in both crude and gasoline.

The Aussie should have by rights been lower over 24 hours on a weaker euro-dollar and euro-yen, and a stronger dollar index, but yesterday's surprise return to trade surplus in April meant the dollar is moderately higher at US$0.8446.

It's also worth noting that our big-name miners were down only slightly in US trade despite weaker commodity prices, and that Rio Tinto ((RIO)) was actually up 1% in London after yesterday's strong local market.

It is also worth noting that last night the VIX volatility index on the S&P 500 fell to 29. Numbers above 30 have historically indicated heightened fear.

The SPI Overnight fell 6 points.

Watch out for tonight's US jobs number.

Well that's it from me – I'm now off on a two week break which I think will involve a lot of sleeping. For the next fortnight the Overnight Report will be brought to you by our illustrious Editor, Rudi Filapek-Vandyck. Please behave yourselves while I'm gone.

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