The Overnight Report: What Storm?

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By Greg Peel

The Dow rose 136 points, or 1.0%, while the S&P gained 1.1% to 1427 and the Nasdaq added 1.4%.

One gets the impression yesterday's sharp sell-off in the local market had been brewing for some time. On face value there seemed little reason to be so skittish – Wall Street reopened on a steady note despite possible Sandy ramifications, the Chinese manufacturing PMI crossed into expansion, and even the Australian PMI increased. But face value can be deceiving.

Our market has matched Wall Street in the solid run-up from June, yet when Wall Street posted a couple of weak sessions recently we really didn't blink. We also pushed higher over the two days of US market shutdown without an offshore lead, suggesting Wednesday night's flat session on Wall Street may have been a disappointment. China's official manufacturing PMI did increase to 50.2 from 49.8 in October, suggesting the output slide in China has now bottomed and turned, but ex-China markets tend to put more faith in HSBC's independent calculation. It showed a similar trend in rising to 49.5 from 47.9, but didn't quite hit the magic 50.

As for the Australian PMI…well…manufacturing in this country remains a basket case. The rise to 45.2 from 44.1 was better than a fall, but if the Australian manufacturing industry was a V8 supercar this result simply suggests a shift down to about seventh gear from eighth hurtling down Conrod. The industry continues to contract at a frantic pace.

The market was also spooked, arguably for the third time, by the NAB ((NAB)) result. Once on the earlier profit warning, again on Wednesday's official release, and again yesterday following bank analyst revisions. (See: Analysts Remain Wary Of NAB). While NAB has its own individual issues, the “look-through” implications for the sector of local bad debt issues cannot be ignored. All the Big Banks have run hard these past months, despite anaemic earnings growth projections, due to the yield on offer in a yield-hungry world. Eventually, they were going to run too far. We'll now be keeping an eye out for Westpac's ((WBC)) result on Monday.

The big miners also took a beating, which might just be helped by concerns the rebounded spot iron ore price has hit a ceiling at US$120/t and may now drift off again.

And finally, Wednesday was the last day of the month and hence the surprising strength in the local market on that day was likely to do with funds buying for the purpose of “window dressing” monthly returns. Job done, those positions were then exited yesterday. All of the above adds up to why we posted a bit of a shocker yesterday. And now the Dow's gone and rallied triple digits.

The weak US earnings season is drawing to a close, and the Sandy effect has been absorbed, so last night's rally on Wall Street was all about economic data.

The US manufacturing PMI rose to 51.7 in October from 51.5 – not a big jump and only weak expansion, but nevertheless another result in the right direction. The US consumer – of paramount importance to the US economy – continues to feel better and better about life. The Conference Board consumer confidence measure for October came in at 72.2 from 68.4 in September to mark its highest level since February 2008.

Those surveyed offered an improving housing market and falling unemployment as reasons for their gradually recovering confidence. Note that a truly “confident” number would be 90, last seen in early 2007 before the excrement hit the rotating cooling device.

Speaking of unemployment, last night's ADP private sector number for October showed an increase of 158,000 jobs. It sounds relatively positive, but the problem is ADP has yet again changed its job-count methodology in the wake of a series of results seemingly in contradiction to the official non-farm payrolls number in the same month. Hence we've been talking apples and now we're talking oranges, so we'll need to see two or three more ADPs before a trend can be understood. Meanwhile, Wall Street is sweating on the official number due tonight.

Obama will be sweating too.

And on the subject of the election, it's clear to everyone that Sandy has blown straight into the president's lap, thus edging him ahead of Romney in subsequent polling. There is a flipside that Obama may lose votes from people in the Democrat-leaning regions devastated by Sandy being unable or too distracted to get to a booth next Tuesday, however last night's rally flies in the face of a Romney victory being a big boost for Wall Street and vice versa.

Just to round out the PMI news, the UK's manufacturing number fell to 47.5 from 48.1 as En-ger-land continues its post-Olympic slide. Silk purse one day, sow's ear the next. The eurozone will report its (gulp) PMI tonight.

If it was a hot night for stocks, it was also a hot night on the LME. Base metals have had a habit, in recent times, of doing three fifths for many sessions in a row then suddenly spiking one way or the other. On positive Chinese and US PMI numbers, last night copper, nickel and zinc all rose over 1%, aluminium and tin over 2%, and lead over 3%. And having suggested US$120/t was looking like a ceiling for iron ore, we note spot has jumped a dollar to US$120.30/t.

West Texas crude also liked the local data and rose US71c to US$86.95/bbl, but an unimpressed Brent lost US37c to US$108.17/bbl.

Commodity price movements belied another slight tick up in the US dollar index, to 80.04, as did the Aussie, which has just breached US$1.04 again. Gold was nevertheless off US$6.50 to US$1714.40/oz.

What a difference a day makes. The SPI Overnight is up 43 points or 1.0%.

So we're now on US jobs watch once more, with non-farm payrolls the last critical US data point before next Tuesday's election.

Note that US summer time ends on the weekend so from Tuesday the NYSE will close at 8am Sydney time.

 

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