The Overnight Report: Jostling For Position

This story features BHP GROUP LIMITED. For more info SHARE ANALYSIS: BHP

By Greg Peel

The Dow closed down 12 points or 0.1% while the S&P rose 0.1% to 1183 and the Nasdaq rose 0.1%.

A funny thing happened yesterday. The Bank of Japan left its rate on hold which was of no surprise given the cut from 0.1% to zero the previous month. But the BoJ announced it was moving the date of its next meeting from the scheduled November 15-16 forward to November 4-5. The Fed makes its QE2 announcement on the third.

What are we to glean from this? Scenario One: the BoJ has no idea what the Fed is about to do so just in case the QE2 decision proves devastating for the yen (in this case, pushes it way higher) the board has called an emergency meeting so it can act swiftly. Scenario Two: the BoJ has been on the phone to Ben Bernanke who, in the spirit of central bank hands across the water, has informed the board on exactly what will be announced on the third but asked the BoJ not to give the game away. So in the latter case the BoJ knows exactly what it needs to do but won't do anything ahead of the Fed.

Fascinating. I'd favour Scenario Two and suggest the BoJ is readying to intervene to cap the yen when it shoots up on a larger than expected QE2 announcement. Because if it were a smaller than expected QE2 announcement the BoJ would not need to intervene at all. Or maybe I'm being double-bluffed. Who knows?

Wall Street certainly doesn't. As we enter the last five minutes of the last hour of the seemingly interminable Age of Man known as The Wait For QE2, the jostling in markets overnight suggests little more than preparatory positioning or squaring. Two trends have been apparent recently – one is that if the US dollar goes down stock go up and vice versa and the other is that longer US bonds have been quietly losing favour to shorter US bonds. The ten-year yield has gradually risen from under 2.4% when QE2 speculation was fervent to over 2.7% as QE2 approaches (may not sound like much but the US bond market is far and away the biggest financial market in the world so every basis point is worth a bundle).

On Wednesday night, the US dollar bounced following speculation from a Wall Street Journal article that QE2 will be smaller than expected. Last night that article was quickly dismissed. The US dollar was sold down a full 1% to 77.30, even in the face of more sovereign debt rumblings out of Ireland.

The US ten-year bond yield reversed its latest trend and dropped six basis points to 2.67%. The weak five-year Treasury bond auction of Wednesday was last night overturned by solid demand for the US$29bn of seven-years on offer. The 1.97% settlement was lower than traders had anticipated and foreign central banks retained their 50% buying average.

Despite the dollar crunch, the stock market did not rally. It did jump 50 points early after weekly new jobless claims came in at a drop of 21,000 when a rise of 3,000 was expected (third drop in a row) but it ultimately closed flat.

There were no other economic data points of interest last night and earnings reports were again mixed, with a good result from Exxon (Dow) offset by a weak result from 3M (Dow). (Note: Microsoft (Dow) posted a strong result after the bell and is up 2% in the after-market).

The stock market (as measured by the S&P 500) has been relatively flat all this week on a close-to-close basis, and with QE2 looming next Wednesday it appears not even a 1% drop in the dollar can affect any bold risk-taking.

Commodity markets were also flat last night, with oil up US24c to US$82.18/bbl and London base metals mixed on small moves.

Gold, on the other hand, went with the dollar in rising US$18.50 to US$1343.90/oz to more than reverse Wednesday night's drop. Silver was up 2%. The Aussie clawed back 0.6 of a cent to US$0.9788.

So it would seem the QE2 positioning is all now happening in the financial markets while equity and commodity markets are squaring up.

What we now have by way of QE2 speculation is that the two camps – less and more – are converging. The suggestion is the Fed will announce only US$250-500bn of QE on Wednesday to be implemented over the next few months, but that eventually the Fed will implement a total of US$2 trillion in stimulus. The latter figure is unlikely to be articulated if it is accurate. On that basis, even a US$250bn announcement does not have to be disappointment for the market if Wall Street feels that the longest journey begins with the first step.

The problem is, if the Fed does announce only a small initial package and suggests more will come if necessary we will continue to trade amidst a cloud of uncertainty. Every single economic data release will see the markets swing back and forward as QE2 speculation rolls on. Please Mr Bernanke, just give us the whole story so we can get on with life.

What does the Bank of Japan know?

What does Glenn Stevens know? He has to make a rate decision on the Tuesday before the Wednesday of the Fed meeting. However, the weak Q3 CPI reading this week has likely provided sufficient breathing space for the RBA, the Aussie is helping to cap inflation in Q4, sovereign debt issues are again simmering in Europe, and we still don't know whether the Australian banks will go it alone next week. (Except that the public frenzy is being whipped up by the idiots in Canberra, talk of an inquiry from Senators who likely wouldn't know how one run a chook raffle let alone a bank, and a supposed investigation from the ACCC – the very same organisation that never blinked when Westpac took St George and CBA took BankWest, thus allowing two banks to accumulate 75% of all Australian mortgages – may well have scared the banks off.)

There will be no rate rise on Tuesday.

The SPI Overnight was down 6 points.

Tonight in the US the first estimate of September quarter GDP will be released. Previous expectations of 1.9% growth appear to have given way to a 2.1% consensus. Unless the number is substantially different, it won't affect the decision the Fed no doubt already knows it will announce on Wednesday. Dow components Chevron and Merck will report tonight.

In Australia we have a round of data today which might otherwise interest the RBA, but probably not enough to make any rash decisions ahead of the Fed. We have private sector credit, new home sales and the RP Data-Rismark monthly house price index.

Another point to note from last night: Potash Corp posted a strong profit result, allowing the board to thumb its nose at BHP Billiton ((BHP)) and reiterate that BHP's offer undervalues the company.

[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