The Overnight Report: Trying Hard

This story features COMMONWEALTH BANK OF AUSTRALIA. For more info SHARE ANALYSIS: CBA

By Greg Peel

The Dow closed down 33 points or 0.3% while the S&P lost 0.4% to 1324 and the Nasdaq dropped 0.7%.

The Dow has now closed down eleven of the past twelve sessions, with uncertainty over Greece the familiar driver. Earlier sessions had the average dropping sharply from the open ahead of a grinding recovery to a lesser fall. More recent sessions have seen a similar fall on open, an attempted crawl back, but then a late day sell-off. Last night the Dow opened strongly, up 90 points, but drifted gradually lower all day. The buy-on-the-dip players are fighting a good fight, but not making any headway. One wonders when they will capitulate and simply stand aside.

Capitulation was certainly written all over the Australian market yesterday.

Driving Wall Street's strong open were some positive economic data. US housing starts rose 2.6% in April to an annual average of 717,000 and March starts were revised up from 654,000 to 699,000. The gloss wore off slightly, with a 7% fall in permits in April (permits precede starts), but March permits were revised up to 769,000 – the highest level since 2008. These data follow on from Tuesday night's encouraging rise in the housing market sentiment index. [For more on US housing, see US Housing Reaches A Turning Point.]

US industrial production rose by 1.1% in April to mark the strongest gain since December 2010. Both the housing start and IP numbers exceeded economist forecasts.

Such comforting data provide further impetus for those across the globe looking to the US dollar as the best safe haven option, even if it is on a lesser of the evils basis. Last night the dollar index was up yet again, by 0.2% to 81.41. I noted yesterday that the dollar rally this year is a replication of similar moves in 2008 and 2010, both of which were nipped in the bud by QE. This 2012 rally, which began in late April and has not taken a backward step since, equates to a 3.3% gain. It doesn't seem substantial, but on a continuous move basis this is the longest rally the dollar index has seen since 1985.

Will this one be nipped in the bud by QE3 as well? That's what everyone was looking to find out from last night's release of the minutes of the last Fed meeting. One has to look for the subtleties, and in the case of the April meeting “several” committee members were in favour of further stimulus if necessary. In March, only “a couple” of members held such a view. The FOMC nevertheless continues to feel QE3 (an expression never used directly by the Fed) will only be unleashed were the economic situation to change “dramatically”. Obviously, Europe could well provide the drama, but as last night's data indicate, the US economy is still moderately improving.

The other issue for the Fed is that of this year being an election year. The central bank would normally hold off on any significant policy changes until the fiscal policy picture becomes more clear, and this election brings the promise of fiscal upheaval.

So the minutes were comforting, but not of sufficient “shock and awe” potential to stem the gradual slide. They probably allowed more of an ease down in stock prices rather than a collapse nevertheless. Meanwhile, commodity prices continue their gradual slide which, with the end-demand situation uncertain, is simply a reflection of the stronger US dollar.

And that includes gold. When uncertainty has struck over the past few years, the typical response from investors has been to liquidate into cash or the equivalent and that also means selling gold. Once the shake-out has proven sufficient, the buyers come back in, and any QE injections provide the next bout of upward momentum. Gold has, in recent years, managed to rise in price on occasion despite a rise in the US dollar index on a rush to exchange euros for the precious metal haven. Right now it seems euros are heading straight into US and German bonds despite negative real returns. Perhaps the thought is that if Europe really did implode, gold is somewhat difficult to eat.

Leaving Greece aside for the moment, Mr Hollande is driving what will likely be a new change in tack for the healthier members of the eurozone, in which growth stimulus will replace blind austerity and budgets will be carefully managed accordingly. Stimulus simply implies more QE, or the equivalent of, from the ECB.

Gold fell US$4.80 to US$1539/oz last night, while the base metals other than aluminium all posted 1-2% further falls. Brent crude lost US$2.30 to US$109.15/bbl and West Texas fell US$1.38 to US$92.60/bbl.

The US ten-year yield ticked down last night to 1.76% and the German equivalent has fallen below 1.50%. The VIX volatility index continues to tick up, ever so quietly, and has now passed 22.

After the big wash-out on Bridge Street yesterday, the SPI overnight fell 2 points.

Commonwealth Bank ((CBA)) will provide a quarterly update today to complete the “season” for the Big Four.

Fans of Rudi's regular Thursday appearances on Sky Business will need to contain their disappointment this week and next, as Rudi is on an overseas assignment.

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