The Overnight Report: Running On Adrenalin

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By Greg Peel

The Dow rose 123 points, or 0.8%, while the S&P gained 1.0% to 1650 and the Nasdaq added 0.7%.

Eighteen billion. Bit of a turnaround. Yet still a concerted plan to return the Budget to surplus. Fiscal policy for politics’ sake countermanding monetary policy for the economy’s sake.

The Aussie dollar has fallen another 0.6% to US$0.9883, but it really has little to do with Wayne Swan’s $18bn deficit, or the Australian Budget in general. It’s all about the US dollar, which is now on a tear. The US dollar index rose another 0.5% to 83.64 last night as the dollar-yen traded above 102 yen.

Last night’s only US economic data release of note showed import prices fell 0.5% in April, in line with expectations, and mostly reflecting lower oil prices. Meanwhile, data in Europe indicated eurozone industrial production rose a surprising 1.0% in March, ahead of February’s 0.3% gain and easily beating forecasts of 0.5% growth. The zone’s ZEW survey of investor sentiment ticked up to 36.4 from 36.3, but this fell short of expectations of a rise to over 39.

Stock market traders put the rise in the S&P 500, which having broken through 1600 has rushed up to 1650 in rapid time, down to the rise in the US dollar. Forex traders put the rise in the currency down to the rise on Wall Street. Both are feeding upon each other with a backdrop of a consistently weaker yen and ongoing talk of just when the Fed might begin reining in QE.

A stronger US dollar will not ultimately be beneficial for US companies relying on exports to, in particular, China, just as a strong Aussie has impacted on the Australian economy. Were the Fed to begin winding back its accommodative policy, the presumption is the US stock market would not take the news well. If the Fed winds back because the US economy is looking healthier, that’s a positive. If it does so because of concerns the stock market is becoming overheated, that’s not so good.

Base metal prices tumbled last night in London, with copper falling 2% and other metals falling over 1%. The strong US dollar has a clear influence on US dollar-denominated prices, but the talk in London was also of Monday’s weaker than expected Chinese data. Gold fell another US$4.60 to US$1425.80/oz.

Spot iron ore dropped US$1.30 to US$128.10/t.

Last night the International Energy Agency warned of a global “supply shock” being driven by the explosion of production in US shale oil. Energy self-sufficiency is a Holy Grail for the US economy, but the IEA noted that global supply is now set to outpace the growth in oil demand from emerging economies. The surge in North American output suggests that all of the growth in global demand can be met by non-OPEC producers. For someone who obtained his driver’s licence in 1980 and then immediately had to queue for petrol on an “even” day, this scenario is almost incomprehensible. For Wall Street, the implications are significant, and arguably the most influential driving force behind a record-breaking stock market outside of central bank manipulation.

Could shale provide the Fed with an excuse to withdraw? Last night West Texas fell US$1.03 to US$94.14/bbl but Brent, the European benchmark, dipped only US19c to US$102.60/bbl.

The SPI Overnight rose 32 points, or 0.6%. The government’s budget had already been declared irrelevant by Bridge Street before it was brought down, and corporate investment is largely on hold for the next four months ahead of the inevitable. The Coalition has come this far without anything much in the way of a policy, so why blow it now? Until we know what Coalition policy will be, no one is placing any significant bets.

Tonight the eurozone will revise its measure of March quarter GDP, while industrial production, housing sentiment and the PPI will be released in the US along with the Empire State manufacturing index.

Vehicle sales numbers are due in Australia along with the March quarter wage cost index, while CSR ((CSR)), SingTel ((SGT)) and SP Ausnet ((SPN)) report full year results and Commonwealth Bank ((CBA)) provides a quarterly update.
 

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