The Overnight Report: Is Old News Good News?

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By Greg Peel

The Dow closed down 30 points or 0.2% while the S&P closed flat at 1413 and the Nasdaq gained 0.2%.

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

This statement from Ben Bernanke reversed what might otherwise have been a more substantial “exhaustion” slide on Wall Street last night. The minutes of the last Fed meeting, held a month ago, indicate the Fed may be a lot closer to pushing the QE3 button than the market had assumed. In its statement at the time, the Fed appeared to be sticking to its “if needed” line were the US economy appearing to stumble. Since the meeting, US economic data have improved and Wall Street has gradually decided QE3 is less likely. But do the data point to a “substantial and sustainable strengthening”?

One would have to say no, particularly with regard to the unemployment numbers, in which case the minutes seem to suggest we'll be seeing QE3 in September. However no one on Wall Street is 100% convinced. Realistically we're still where we are, in policy speculation terms, a month ago. The difference is that stock markets have rallied significantly in the mean time. In the past, if someone had yelled “QE is coming!” on Wall Street we would have flown to the moon. All last night's apparently dovish minutes achieved was to turn the Dow around from an 80 point loss to a 30 point loss.

And there's the other consideration: We've had QE1 and QE2 and Operation Twist, yet we don't seem to have achieved a lot. Will QE3 be any different?

It is interesting that the European stock markets were in exhaustion sell-off mode last night, falling over one percent ahead of the Fed's release. It is action from the ECB the world is really waiting for – the Fed is merely the sideshow. If Draghi acts emphatically, QE3 should not be needed. And on that score we still have a wait in front of us.

The Greek prime minster travelled to Berlin last night, cap in hand, to put his case to Angela Merkel. Greece does not need more money, Samaras declared, no doubt to swift outtakes of breath, but if it is to make good on austerity demands it does need more time. Two years of it. The request was well flagged and Merkel is yet to respond, while Samaras will move on to Paris tonight for a repeat performance.

There are many moving parts which have to fall into synch for Draghi to do exactly what the world wants, and do it as early as September 6. In the meantime, we could speculate ourselves into an early grave. Wall Street, and global markets, have positioned themselves very early for good news. Markets will never, however, stand still. If you can't buy it any more then it will have to be sold. And that's where we're at at present. There is nevertheless a similar limit to downside potential in the face of possible central bank action.

Other markets responded last night as one might expect on a sudden heightening of QE expectations. The US dollar index fell 0.4% to 81.53 and the US ten-year bond yield fell 9 basis points to 1.72%. Gold rallied US$16.60 to US$1654.50/oz and the Aussie ticked up a bit more to US$1.0505.

Base metal markets only had a very brief time to respond to the Fed minutes before closing but prices are all a little stronger. Brent crude is up US27c to US$114.91/bbl and West Texas is up US48c to US$97.32/bbl.

The SPI Overnight was up 9 points or 0.2%.

The Australian reporting season has been nothing if not interesting so far, and today sees literally the busiest day the the whole season on number of company reports. Among them are Fortescue ((FMG)), IAG ((IAG)), Origin ((ORG)) and Qantas ((QAN)), while David Jones ((DJS)) has also picked a good day to release its June quarter sales numbers. Please see the FNArena Calendar for further information.

Today also sees the release of HSBC's flash reading of the Chinese manufacturing PMI for this month, which is followed tonight by the eurozone and US equivalents.

Rudi will appear on Sky Business today at noon.

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