The Overnight Report: Back To 2007

This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO

By Rudi Filapek-Vandyck, Editor FNArena

US equities put in a firm performance overnight, pushing indices back to levels last seen in late 2007 and within arm’s length of all-time highs. The S&P500 added 8.30points to close at 1480.93 (up 0.56%). The Dow Industrials gained 84.79 to 13596.02 (up 0.63%) and the Nasdaq gained 0.59% (up 18.46points) to close at 3136.00. The latter happened despite a still struggling Apple.

Tonight I'm gonna have myself a real good time
I feel alive and the world it's turning inside out Yeah!
I'm floating around in ecstasy
So don't stop me now don't stop me
'Cause I'm having a good time having a good time
(Queen, Don't Stop Me Now)

In case you hadn't figured it out just yet, this market wants to go higher and just about any reason is good enough.

Witness, for example, yesterday's price action in Sydney when a weak unemployment update saw volumes explode and indices rally to be up 1% before common sense sunk in and most of the gains were handed back.

Another characteristic of the present mood is that buying orders are constantly switching from sector to sector. Materials stocks out of fashion? Let's buy the banks! Banks no longer good? Let's do Discretionary Retail and IT!

In the US overnight, bank stocks were no longer good, as the likes of Citi and Bank of America disappointed with their quarterly updates, but everything related to building and the housing market turned hot after better than expected data on US housing starts and an in-line update on building permits. Consumer-discretionary stocks proved equally popular following an unexpected large drop in weekly jobless claims.

In economic news, the Philly Fed manufacturing index surprisingly fell to minus 5.8 in January, from a revised 4.6 in the prior month and against consensus expectations for a modest improvement. Earlier in the week we also saw a disappointing Empire (New York) manufacturing read. The big news, however, was that December housing starts rose by a staggering 12% to a 954K annual rate, easily surpassing consensus expectations for a modest lift to a 890K rate. The rate of permits was only marginally higher than the prior month and below the rate of starts (at 903K), but it was also a more than four year high. Enough reason for Wall Street to put a rocket under share prices.

Before we all get too excited about a seemingly dramatic drop in the weekly initial jobless claims: the methodology behind the numbers changed on January 1. It is as yet unclear as to how much impact this change has had on what is being reported. So we are comparing apples with oranges. Not that anyone on Wall Street would have cared. On raw data, weekly initial jobless claims dropped to 335K, from a largely unrevised 372K in the prior week. Both the individual figure and the four week average are now at a new post-recession low. Hallelujah!

Would you believe the initial part of the European session was rather directionless, with markets drifting in and out of positive territory, not making any notable headway. There was also a successful Spanish bond auction to help prop up spirits.

In corporate news, the BIG news this morning is CEO Tom Albanese getting the sack at Anglo-Aussie mining conglomerate Rio Tinto ((RIO)). Paying US$4bn for coal miner Riversdale in 2011 and then having to write-down US$3bn less than two years later was deemed unacceptable by the Board, and may we say rightly so!

On top of the US$3bn Riversdale write-down, Rio is to announce further write-downs to the tune of US$10-11bn which is the tail end of that other remarkable acquisition, that of Alcan. The good news is, this should be it as far as cleaning the slate goes at Rio Tinto and if iron ore prices remain well above US$110/tonne, the mining conglomerate is looking towards two more years of exceptional profitability. That's not just my personal view. Commodity analysts at Goldman Sachs said exactly that in a sector update this week.

I wrote a story on Rio Tinto this week in which I predicted the write-downs and suggested the two golden years ahead. For those who've missed it: http://bit.ly/WJO8wU Shares of both Rio Tinto and BHP Billiton ((BHP)) closed lower in London following the announcement on Rio write-downs.

In US corporate news, shares of Citi and Bank of America remained under pressure (see above), but global manager of funds Blackrock pleased and so did eBay. Retailer Williams-Sonoma stated it couldn't possibly upgrade its guidance and that was taken as a disappointment.

Chip-bellwether Intel is due to report after the bell and that's always one to watch.

Commodities in general enjoyed a buoyant session as risk appetite in general spiked up on the day. Brent crude was up by US$1.55, or 1.4% to US$111.08 and Nymex crude rose by US$1.25, or 1.3% to US$95.49 a barrel. Oil prices were supported by terrorist action in Algeria. Base metal prices rose up to 1.8% on the London Metals Exchange on Thursday, with zinc leading the way. Tin was flat and aluminium rose just 0.3%. Comex gold futures moved up by US$7.60 an ounce to US$1,690.80 per ounce. The spot iron ore price (Fe62% in China) was unchanged at US$145.40 a tonne after a week of steady declines.

The Federal Reserve reportedly bought US$3.357bn of Treasuries maturing February 2020 through November 2022, keeping a cap on yields. US 2yr yields were steady at 0.262% and US 10yr yields rose by 6pts to 1.885%.

The US dollar fell against major currencies in European and US trade on Thursday after making ground in Asian trade. The Euro lifted from lows near US$1.3275 to US$1.3385 and was near US$1.3380 in afternoon US trade. The AUD lifted from lows near US104.95c to US105.50c and was near the highs in the afternoon US session. And the Japanese yen eased from 88.23 yen per US dollar to JPY89.91, and was trading at JPY89.83 in afternoon US trade.

The International Olympic Committee has called on disgraced cyclist Lance Armstrong to return the bronze medal he won at the 2000 Olympic Games. The redemption interview with Oprah has been cut in two and will be broadcast today and tomorrow. For maximum impact. In Australia all six Discovery Channels will broadcast the interview. You do need a pay TV subscription to have access though. The anticipated Federer-Tomic match has materialised for Saturday evening.

On the calendar today are the all-important Chinese data, with Q4 GDP expected to print a year-on-year gain of 7.8% from 7.4% in Q3.  That would see 2012 average growth of 7.7%. The numbers should hit pc screens in Australia around 1pm today. Iron ore pellet producer Grange Resources ((GRR)) should release its December quarter production numbers.

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