Daily Market Reports | Apr 05 2013
By Greg Peel
The Dow closed up 55 points, or 0.4%, while the S&P gained 0.4% to 1559 and the Nasdaq added 0.2%.
After a weak lead from Wall Street and strong falls in commodity prices, particularly oil, it was no great surprise to see the local market fall 0.9% yesterday. Yet in terms of economic data, yesterday was a cracker.
Manufacturing is still wallowing, but the service sector PMI for March showed a rise to 49.6, only slight contraction, from February’s 48.5. Building approvals shot up 3.1% in February, against the trend of weak construction, and retail sales floored everyone with a 1.3% gain. A gain of only 0.3% had been expected, after a solid 1.2% rise in January, and this number does not count domestic online purchases.
Under any normal circumstance, such data should have been enough to square up the index. But in 2013, such data pretty much put thoughts of another RBA rate cut to bed. The market is now fearing an RBA rate hike instead, although if the central bank has waited this long to see how last year’s cuts play out, it’s not about to panic and raise tomorrow.
The big news from yesterday was the much anticipated Bank of Japan monetary policy meeting, the first under the new governor. And he didn’t disappoint. Mr Kuroda announced a 2% inflation target for Japan within two years, and a US$530bn per year bond purchase program, doubling the BoJ’s holding of Japanese government bonds (JGB). The yen began to plunge even before the announcement, and when the dust cleared, it had fallen over 3% against the US dollar.
A weak yen and stimulated Japanese economy is potentially good news for Australia, as it is the first time in two decades our longstanding raw material customer has had an economic kick up the backside. This should lead to more demand for Australian exports although the flipside is the higher price Japan will have to pay in their own currency. Australia is not alone nevertheless, as the yen has fallen against everyone’s currency. The bad news is that Aussie bonds now look even more attractive on a yield differential basis. The yield on the ten-year JGB fell 10 basis points to 0.458% on the central bank announcement.
Over in Brussels, Mr Draghi once again left the ECB cash rate unchanged, but opened the door for a rate cut soon given what he described as downside risk to an already weak eurozone economy. The ECB meeting coincided with the release of the eurozone service sector PMI for March, which showed a fall to 46.4 from 47.9.
The UK equivalent saw a pleasing rise to 52.4 from 51.8, providing relief against a stubbornly weak manufacturing sector. The Bank of England also left its rate unchanged and announced no increase in QE.
Following on from Wednesday night’s weaker than expected private sector jobs number, last night saw a 28,000 jump in US weekly new jobless claims to the highest level in four months. Ahead of tonight’s official non-farm payrolls release, it was another sour note for what is supposed to be the best looking economy in the world right now. Wall Street did not take the claims number well, but swung backward and forward all session as it weighed up all the news, including the good news on Japanese stimulus. After Wednesday night’s plunge the buyers were back sniffing around, and more talk of North Korea’s actions being a typical cry for attention and nothing more helped to calm nerves.
The yen took the big bath last night, but short covering in both the euro and the pound left the US dollar index little changed at 82.70. The Aussie also seems to have a wheel stuck in a rut at the moment, posting another negligible move to US$1.0436. Gold is quite simply on the nose for the time being, given another US$5.10 drop to US$1553.60/oz despite the Tokyo printing presses now working round the clock.
The implicit devaluation in JGB yields sent traders scurrying into US bonds given their greater attraction for Japanese investors. The US ten-year yield fell 5bps to 1.76%.
Japanese stimulus is not bad news for base metal markets, although last night’s metal price increases of around one percent were put down to short covering due to the two-day Chinese holiday. The oils, on the other hand, paid more attention to the weak US claims number and dour talk from the ECB as Brent fell US77c to US$106.34/bbl and West Texas fell US$1.24 to U$93.21/bbl. Spot iron ore rose US30c to US$135.90/t.
The SPI Overnight gained 16 points or 0.3%.
US jobs tonight, which will likely determine the mood of the market next week. Next week, nevertheless, sees the start of the US first quarter earnings season with the Alcoa report on Monday night. For the following month, Wall Street will look inward.
Note that relevant Australian states go off summer time this weekend, hence from Tuesday morning the NYSE will close at 6am Sydney time until October.
Rudi will appear on BRR Media’s Round Table today at 1pm.
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