The Overnight Report: Ground Control To Major Tom

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By Greg Peel

The Dow rose 72 points, or 0.5%, while the S&P gained 0.5% to 1507, although the Nasdaq, weighed down by some poor mid-cap tech stock results, closed not quite a point lower.

Last night the Conference Board monthly measure of US consumer confidence showed a plunge to its lowest level in over a year. Having peaked at a near five-year high in October at 73.1, the index has since fallen each month and an 8.1 point fall from December to January leaves the number at 58.6. The post GFC low was 40.9, and to suggest true “confidence” it is accepted the index needs to read about 90.

This seems somewhat incongruous as Wall Street looks to reclaim its pre-GFC all-time highs. The result also seems at odds with last night's release of the Case-Shiller 20-city house price index, which showed a 0.6% seasonally adjusted gain in November and a 5.5% gain year-on-year – the biggest gain since 2006. There is a well established correlation between rising house prices and rising consumer confidence. At least, there usually is.

Consumer confidence began falling in the US when Cliff reared his ugly head, and this month's plunge is suggested by the Board to be a direct reflection of the expiry of social security tax cuts on January first as part of the tax side of as yet incomplete Cliff negotiations. Americans have less in their pay packets in 2013. But perhaps the point here is that Cliff and his related Ceiling have yet to be resolved and the battle has merely been postponed. Whatever the outcome, it can only include a combination of tax increases and spending cuts.

We also have an election due soon in Italy. Spain has gone awfully quiet since expectations were high last year the sovereign would ask for a bail-out and the next Greek bail-out tranche will be upon us shortly as well. All of the above are factors which not so much have Wall Street worried in isolation – true panic has been tempered since 2008 as we've all become used to the shenanigans – but has Wall Street worried vis a vis a stock market pushing towards a new all-time high. The air is very thin.

"The public is pouring in now," Carter Worth, chief market technician at Oppenheimer & Co in New York, told Reuters. "It reflects complacency and that typically leads to hubris, and hubris leads to trouble. Everyone's buying."

As the Dow looks to 14,000 (46 points away) as the next psychological hurdle (with the high at 14,164), the ASX 200 is beginning to eye off 5000 (111 points away). This level provided stiff support in 2008 until finally Lehman went down. From the other direction, the market made five attempts to reclaim 5000 over 2009-11 and failed very time. It will take more than a trebuchet to punch a hole in that wall.

Am I being a wet blanket? No. Occasional corrections define a bull market. The point for investors is not to panic if this market, on whatever trigger, pulls back 7% in the next month or more.

The US dollar index is down 0.3% to 79.56, mostly reflecting that weak confidence number. The Aussie was looking like it might just fall into the 103s, perhaps as “safe haven” money continued to exit, but after yesterday's surprising positive business confidence survey from NAB, it's up 0.5% to US$1.0465. Markets are now less sure the RBA will cut next week.

Gold also finally had a comeback on the weaker greenback, rising US$9.10 to US$1663.30/oz, while base metals posted a more definitive gain than recently of around 1% on average. Iron ore was steady at US$148.40/t. The oils have been ticking ever so quietly but persistently upward, with Brent up US88c to US$114.36/bbl overnight and West Texas up US97c to US$97.41/bbl. Strong oil prices have helped to push Wall Street higher, given the cap weight of the Big Oil stocks (recall Exxon is back to number one).

After the biggest rally on Bridge Street in several months yesterday, and despite Wall Street strength overnight, the SPI Overnight is down 2 points.

If anything is going to help Wall Street through its milestones it's the ongoing earnings season. After the bell Amazon reported and its shares are currently up 8% in the after-market. Pfizer posted a strong result during the session, while Ford, despite posting record US sales, sold off 5% on weak European numbers. Tomorrow the Australian six-month earnings season kicks off with ERA ((ERA)). Will earnings help the ASX 200 through 5000?

Ground control to Major Tom your circuit's dead, there's something wrong…

Note: Rudi will be appearing on Lunch Money on Sky Business at noon today, not tomorrow as was reported yesterday.

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