The Overnight Report: It Just Wants To Go Up

This story features BANK OF QUEENSLAND LIMITED. For more info SHARE ANALYSIS: BOQ

By Greg Peel

The Dow closed up 75 points or 0.7% while the S&P added 0.7% to 1178 and the Nasdaq rose 1.0%.

The Dow was up as much as 135 points mid-session before reasonable selling hit towards the close. Nevertheless, Wall Street rallied and rallied strongly and it's actually rather difficult to pinpoint exactly why. Perhaps the clue lies in last night's volume which, at over 1.2bn on the NYSE big board is about 40% more than the recent average. Perhaps it was not just the traders playing last night. Perhaps there was some real buying following an 11% bounce from the previous low.

Reading the wire reports one gets the impression there were three main drivers last night – China, US earnings and the Fed.

Yesterday, China released its September trade balance which was up on August to a level which represented records in both exports and imports. On face value, it was a great result for everyone in and outside China. Yet for some it was a disappointment.

Despite record numbers, China's monthly trade surplus fell to US$16.9bn from US$20.0bn in August. Economists had expected US$17.5bn. Exports rose 25.1% (year-on-year) when 26% was expected, and imports rose 24.1% when 25% was expected. It all comes down whether you can find anything really disappointing in numbers of 25% and 24% growth. You might if you compare to August, in which exports rose 34.4% and imports 35.2%.

So the pace of Chinese trade growth slowed quite substantially in September, but still only slowed to levels that anyone else would be thrilled with. Beijing is trying to slow things down. And there is good news for the US in that a lower surplus is a step in the right direction. The US wants to export more to China and wants China to export less to the US, given the artificial currency.

Or you could say it's not good news for the US because it weakens Washington's argument for swift and decisive revaluation of the renminbi.

So take the numbers as you will. One thing's for certain – they didn't fire up the Australian market yesterday, but then the Australian market is trying to come to terms with its own currency problems.

Earnings reports were another reason given for last night's rally on Wall Street. After the bell yesterday Intel (Dow) beat the Street on both earnings and revenue. Last night JP Morgan (Dow) reported a 23% increase in September quarter profit over last year featuring falling mortgage and credit card delinquencies and a lower cost of funds. At US$1.01cps, JPM's earnings beat the Street's estimate of US90cps, and were up on last year's US80cps.

Yet revenue came in at US$23.8bn against an expectation of US$24.3bn and compared to last year's US$26.6bn. So the result wasn't so pleasing after all. Indeed, JPM shares fell 1.4% in the session and Intel shares fell 2.7%. Not sure where the positive impetus is there.

But there's always the Fed of course, although last night didn't actually bring any “new news”. It is not unusual for Wall Street to spend time absorbing Fed statements and minutes before responding given there is otherwise only a two-hour window on the day of release. So the rally last night was still being attributed to what has been seen as further confirmation from the Fed that QE2 will begin in November.

One interesting point to recall re the Fed is that this time, as opposed to QE1, the Fed has flagged that it may not announce one full QE package to be implemented over time (QE1 was US$1.7trn over 6-9 months) but instead announce smaller skirmishes in a short time frame which can then be assessed and another round considered. So for example, while Wall Street is pricing in US$500bn of QE2, the Fed might start by announcing only US$100bn as a first foray. Would Wall Street be happy with a US$100bn announcement?

So again I suggest that explaining last night's rally is not quite so cut and dried. Therefore I think it might be reasonable to assume, given the volume, that there were more than just day-traders, technicians and computers playing last night. Evidence of a solid bullish groundswell? Or are these the Johnny-come-latelies that signal a peak? At the moment it's difficult not to feel that the S&P 500 has 1220 in its sights – the April peak.

The rally in stocks was supported as usual by a fall in the US dollar index, down 0.3% to 77.07. Again, this might be attributed to a bit of a delayed response to the Fed (the rest of the world had to wait for yesterday's and last night's sessions) although euro strength was an individual factor. Last night the president of the German central bank, speaking in New York, suggested the ECB's program of buying eurozone government bonds (US$78bn to date in an effort to avert a further European crisis) should now be phased out “permanently”. Last night the euro briefly hit US$1.40 which was the pre-crisis high.

And the Aussie conquered another “big figure”, jumping another 0.4 of a cent to US$0.9905. Not long now.

Is gold looking toppy? Well, last night it didn't. Gold jumped US$21.60 to US$1372.40/oz. More Johnnies? Silver rose 3% to conquer US$24/oz for the first time.

Oil jumped US$1.34 to US$83.01/bbl but base metals were a little more subdued in London with increases of around 1%.

And a funny thing happened in the US bond market. Despite all the talk of QE2, demand for the Treasury's auction of US$21bn of ten-year notes was relatively muted. The settlement of 2.495% was again the lowest level since January 2009, but it was about 6 basis points higher than the 2.43% yield going into the auction. Foreign central banks bought only 41% compared to the 44% running average.

The result would tend to suggest the bond market rubber band has stretched about as far as it can and that QE2 is now fully priced in. But with 15 minutes to the close, one or more buyers piled in once more and sent the yield screaming down to 2.42% – down one basis point close to close. So go figure.

The SPI Overnight rose 30 points or 0.7%.

Google's result is due out after the bell tonight and during the session the monthly producer price index will be released, providing the first inflation reading since the Fed suggested it is inflation now being targeted. And the US trade balance will be released.

Today in Australia, Bank of Queensland ((BOQ)) releases its full-year result.

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

Click to view our Glossary of Financial Terms