The Overnight Report: Weaker Data, Stronger Market

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By Greg Peel

The Dow closed up 60 points, or 0.4%, while the S&P gained 0.5% to 1658 and the Nasdaq added 0.3%.

Yesterday saw an uncharacteristically volatile day on the Australian market – up 20-odd, down 50, closing down about 30. The sharp drop suggested a big offshore sell order, targeting material and industrial stocks, possibly in response to sudden weakness in the Aussie. If the Aussie falls, offshore stock investors lose even if stock prices don’t fall.

The scene wasn’t much different on Wall Street last night, which opened down, rallied strongly, fell all the way back again and jumped on the death. It was a session in which the first response was “weak economic data” and the second response was “weak economic data mean no Fed withdrawal just yet”.

Last night’s US housing market sentiment reading showed an increase to 44 from 41 in April, continuing the trend of confidence in the housing recovery. This is not a 50-neutral index as many are, but while 44 is a long way from the GFC nadir of readings in the teens, 44 on a 100 scale does not yet imply a market bursting with confidence.

The US producer price index fell 0.7% on the headline in April, which might otherwise sound deflation bells were it not for the constituent 6% fall in gasoline prices. Lower energy costs are a positive for an economy, offsetting the implications of apparently weaker demand. The core reading (ex food & energy) rose 0.2%, consistent with the recent trend.

Industrial production fell 0.5% after rising in the previous two months, and against expectations of a 0.2% fall. The Empire State manufacturing index fell to minus 1.4 from plus 3.1.

The news wasn’t much better in Europe, where the eurozone March quarter GDP marked a 0.2% fall against 0.1% expectation and the wider EU contracted by 0.1%. Germany just managed to hang on with 0.1% growth, but France fell into recession on a 0.2% contraction.

On balance, the US dollar index rose another 0.2% to 83.77. The Aussie was trading lower in the local session yesterday, but is back to little changed from Tuesday night at US$0.9894. A bigger than expected budget deficit was blamed for yesterday’s fall, but the strong greenback and possibly that sell order were realistically more responsible.

So much for the bounce-back in the gold price. Wall Street might look at weak data and expect a delayed Fed exit, but all the talk on the Street, particularly of targeting September as the beginning of the wind-back, has spooked gold holders. ETF investors continue to bail out in droves, and last night gold fell under 1400 again, dropping US$32.90 to US$1392.90/oz.

Base metals prices were again weaker across the board, with copper down 0.6%. Spot iron ore fell another US$1.70 to US$126.40/t. An unexpected decline in US crude inventories last week helped the oils to rise, with Brent up US$1.08 to US$103.69/bbl and West Texas up US20c to US$94.41/bbl.

The SPI Overnight rose 2 points.

There’s another round of data releases to watch out for tonight in the US, with the CPI, housing starts and the Philadelphia Fed manufacturing index due. Japan will provide a March quarter GDP result today.

Graincorp ((GNC)) will report its interim result today, albeit the stock is under takeover.
 

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