The Overnight Report: Not When, But By How Much

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By Greg Peel

The Dow closed down 105 points or 0.7% to 14,897 while the S&P lost 0.6% to 1642 and the Nasdaq dropped 0.4%.

It was another resilient performance on Bridge Street yesterday, aided by a rise in the S&P 500, propped up by the banks and assisted by some reasonable earnings reports, albeit not all of them. A weaker currency is also on Bridge Street’s side, and as we speak the Aussie is trading below 90, down over a cent.

With earnings reports in focus, Australia is trying not to be overly influenced by Wall Street and the endless taper-talk but is also ignoring the current rout going on in the stock and bond markets of peripheral emerging markets. Countries such as India, Indonesia and Thailand are being gutted as foreign investment dollars flow out on fears the spigot of free Fed money is about to be turned off.  Fortunately, China is not in that mix. Today sees the release of HSBC’s flash manufacturing PMI for August, which is always influential on Bridge Street. And today is one of the busiest days on the reporting calendar.

The emerging market rout is not lost on Wall Street, with all attention last night turned to the release of the minutes of the last FOMC meeting. In short the minutes suggested that the committee was split on the timing of QE tapering. Not tapering per se, but the timing of it. So we can put to bed any notion the Fed won’t start tapering soon.

Half the committee is worried about stubbornly low US inflation and everyone agrees economic data in the meantime are fundamental. Wall Street has decided, on average, that tapering will begin in September, but the new buzz-phrase is “tapering lite”. Rather than assuming the first step would be to drop to US$65bn per month from US$85bn in asset purchases, the Fed will drop to US$75bn per month, it is suggested. Of course, there was nothing in the minutes to suggest tapering had to begin as early as September.

The agreement, nevertheless, is that once it’s on, it’s on. The Fed is not going to cut purchases one month and reinstate them the next. Nor is it likely to make one incremental cut and leave it at that for a year. Tapering, it is assumed, means tapering: gradual and uniform reduction.

That’s what the US bond market is assuming, and has been for months. The benchmark ten-year yield last night rose 4bps to 2.86% after dipping a little on Tuesday night. The flood of money out of emerging markets, as noted above, is a sign of tapering assumption. As for the US stock market, well if we ignore the ridiculous, computer-driven volatility immediately following the release of the minutes, the nervous speculative money is getting out. There is nothing special about Dow 15,000, indeed nothing particularly important about the Dow per se, but big numbers are always psychological and last night the Dow closed below 15k for the first time since early July.

Waiting in the wings are the genuine buyers – those who believe Fed tapering suggest only an improving US economy and stock market value. However, those buyers are in no particular rush, egging on a decent correction to provide more attractive entry prices. Presumably it then becomes a matter of who blinks first.

The US dollar index has shot up 0.5% to 81.32. The Aussie, as noted, is down 1.2% to US$8973. Gold fell, but only by US$6.50 to US$1365.90/oz. Commodity prices are lower.

Trading on the LME closed just before the release of the minutes in the US, and traders were not willing to chance the Fed. Hence falls in base metal prices of around 1-2%, with copper down 0.7%, are pre-emptive rather than reactive. Not so for West Texas crude which is down US$1.20 to US$103.91/bbl on the new October front month. Brent fell US29c to US$109.80/bbl.

Spot iron ore fell US$1.20 to US$137.80/t.

The SPI Overnight is looking fearful, down 41 points or 0.8%.

Today, as noted, we see the Chinese flash PMI from HSBC, followed tonight by similar estimates out of Europe and the US. In Australia today we see an avalanche of profit results. ASX ((ASX)), Alumina ((AWC)), Brambles ((BXB)), Fortescue ((FMG)), Fairfax ((FXJ)), Insurance Australia Group ((IAG)), Origin ((ORG)), Toll Holdings ((TOL)) – that’s just some of them.

Due to the volume of reports (including yesterday), please note that the FNArena Reporting Season Monitor will for the time being be updated in two steps, starting with the larger companies by earlier in the afternoon, and updating for the smaller companies by day’s end. For all release dates, please refer to the FNArena Calendar.
 

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