The Overnight Report: All Hail The Grand Old Party

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By Greg Peel

The Dow closed up 64 points or 0.6% while the S&P rose 0.8% to 1193 and the Nasdaq added 1.1%.

The Dow Jones underperformed the broad market S&P 500 largely because of a weak quarterly result from drug giant Pfizer, but in essence the only driving force that mattered on Wall Street last night was building anticipation, as America headed to the polls, that the Republican party will win back control of the House and maybe even the Senate as well.

In simple terms, a Republican-led lower house is expected to at the very least water down various Obama initiatives on health, environmental restrictions and financial regulation, among others. And importantly, the president's as yet unconfirmed tax hike policy will struggle to gain traction.

Such concessions would mean a boost for the majority of sectors, as well as for personal investors, and that's exactly the way Wall Street was playing it last night. The Dow opened strongly and maintained a tight range through to the close. However, once again an attempt to settle above the April closing peak of 11,205, to thus mark a new two-year high, was thwarted. A late dip saw the Dow close at 11,188 despite 11,219 having been reached in the early afternoon. Above the 11,205 mark the sellers are lined up.

Election speculation has now taken precedence over QE2 speculation if for no other reason that Wall Street is weary of speculating about the Fed. A level of QE2 is “baked in” the market, and whether the announcement sees a small number to begin with with a promise of more to come as needed, or a large number off the bat, is no longer any cause for anxiety. The announcement would have to be wildly different from these two opposing scenarios to have any impact on market perception.

However, it is not yet clear whether any announcement that meets with expectation will also be met with relief buying or, on the other hand, selling of “the fact”. That 11,205 wall in the Dow looks like concrete at the moment, but a substantial breach may scare the sellers or shorters off.

The US dollar is nevertheless responding as if QE2 were a given and as if the oft suggested overdue bounce is mere piffle. Last night the dollar index fell 0.75% to 76.71 to hover just above the January low which was marked just before the European crisis hit. The low before that was just under 75 in November, ahead of the Dubai scare, and the low to beat all lows was just above 70 immediately after Lehman.

Interestingly, last night's dollar drop did not propel the Aussie through parity, just yet. At US$0.9990 the Aussie is little moved from yesterday's trade when the RBA surprised with its rate hike. Clearly parity for the Aussie is staunch resistance.

On the subject of the Cup Day rate rise, if one reads back through both the RBA's October statement and the minutes of that meeting the hints are clearly there. The statement suggested rates will “have to rise at some point” and the minutes suggested the situation was “finely balanced”. The impression is given that the only thing holding back the RBA in October was ongoing European uncertainty. While Europe has become no less uncertain in the interim, other than lasting another month without collapsing, the RBA had indicated that it couldn't wait around for ever. Having been caught out in early 2008, the central bank was determined to launch a preemptive strike against the inflation pressures created by the commodity boom. The weaker September quarter inflation numbers were clearly not enough to swing the fine balance. Nor stable house prices, nor weakening credit demand, nor the knowledge that the banks would most likely have increased their rates independently if the RBA had held off.

Nor was the strong Aussie, which could be anywhere by tomorrow including through parity, considered enough of an inflation dampener. Nor was Australia's “two-speed” economy, to which Glenn Stevens alluded in his statement, enough for the RBA to decide maybe one more month of watching and waiting would be okay.

Following CBA's 45 basis point SVR hike to the RBA's 25, Comrade Joe is now Hero Of The People. Westpac ((WBC)) reports today, so stand by for its rate hike, with NAB and particularly ANZ potentially likely to be more subdued.

But back to the US.

The bond market again saw buying last night pushing the ten-year yield down four basis points to 2.59%. Gold was somewhat timid, adding only US$4.70 to US$1356.30/oz despite the big drop in the US dollar.

Oil rose US95c to US$83.90/bbl while copper, lead and zinc all posted 1% plus gains and aluminium 2% plus, while nickel and zinc were steady.

The SPI Overnight rose 13 points or 0.3%

Nothing much else now matters, other than confirmation of the US election results, ahead of 2.15pm New York time tonight (5.15am Sydney). Let slip the QE2.

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