The Overnight Report: What Can Derail Wall Street?

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By Greg Peel

The Dow rose 135 points or 0.9% while the S&P gained 0.3% to 1689 as the Nasdaq fell 0.2%.

Resistance is futile, said Bridge Street to the ASX 200, as stocks again pushed higher yesterday with a sharp rise to the close. The 5200 level now seems safely in the bag with a close of 5234, leaving 5250 as the next technical level to be conquered. The rally through 5000 has been very much “risk on”, very much cyclical, with defensives now the pariahs. Yesterday telcos and utilities fell and consumer staples went nowhere as cyclicals, with the exception of energy, pushed higher. Energy was impacted by the ongoing decrease in the oil price’s Syria premium.

Helping the mood was the release of the Westpac-Melbourne Institute consumer confidence survey for September, which showed a 4.7% gain to 110.6 from 105.7 in August to mark the highest level since December 2010. The survey was conducted from September 2 to 8, hence it caught not only the late polls heading into the election but also the result. Westpac has cited election goodwill as a fillip, as did NAB with its own business confidence survey on Tuesday, although the under-swell is all about RBA rate cuts.

The consumer confidence index is now 13.8% higher from the point of the first RBA rate cut, notes Westpac, and 9.9% higher than the average over the period since that first rate cut. In other words, the successive rate cuts are helping confidence to gain momentum.

The ASX 200 has now exceeded its previous post-GFC high, set in May, and has not been at this level since 2008 when it was falling, fast, in the other direction. But while Wall Street has since enjoyed a period of new all-time highs, the ASX 200 all-time high of 6828 set in October 2007 seems like a manned mission to Mars at this point. Blame the Aussie, although it’s encouraging to see Bridge Street rallying this week despite quite a sharp bounce in the currency.

It was a day of reflection on Wall Street last night as all paused to remember 9/11, a day when many financial market representatives were lost. The mood on the NYSE floor may have been sombre but the buying pushed on anyway, with only Apple souring the mood. The release of Apple’s new cheap and cheerful iPhone lite for the emerging markets late on Tuesday was not well received, given a price point not so cheerfully cheap, and Apple shares fell 5% last night. Apple dragged down the Nasdaq and impacted on the S&P.

The talking point last night was nevertheless not in the stock market, but in the bond market. Telco giant and Dow component Verizon last night presided over a corporate bond deal so large that it blew the history books off the shelf. The company successfully sold US$49bn of ten-year paper at 225bps over Treasury, with the bonds trading higher still as soon as they were listed. To put that into perspective, everyone said “ooh” earlier this year when Apple set the last record on a bond issue at US$17bn. Verizon will use the money to help it buy back the 45% stake in its wireless operations owned by Vodafone.

Making the session even more remarkable was the fact there just happened to be a regular Treasury auction of ten-year bonds going on last night as well, and it was also well received. The US$21bn tranche was put away at two basis points under the prevailing yield.

Hang on. Aren’t we all meant to abandon our fixed income investments now that the 30-year bond rally is over and Fed’s about to begin tapering? Should we not be switching into risky equities on the reality there is no other choice, even though those equities are sure to collapse as soon as the Fed starts turning off the tap?

Talk on the Street is predominantly that the Fed will announce the beginning of tapering next week despite not so flash economic data of late, but it will be a matter of degree. The Fed is almost forced to taper given the falling US budget deficit means there’s not so many bonds to buy. And there appears to be an agreement that while QE1 was essential and QE2 was a help, QE3 has had little incremental impact. It’s costly, so it’s time to start backing away and let the US economy stand on its own two feet. Wall Street is ready.

As for the interest in both corporate and government bonds last night, does this mean the bond market is expecting no tapering? No. I suggest that talk of the end of the 30-year bond rally does not imply a balanced investment portfolio should not contain an allocation of fixed income. A US ten-year Treasury yield near 3% is a lot better than the 1.6% on offer less than five months ago, with cash still at zero, and blue-chip paper at 225bps over that rate looks mighty attractive.

The US dollar index fell 0.4% to 81.51 last night as the currency du jour – the pound – shot up on a lower than expected UK unemployment number. The Aussie is steady at US$0.9328.

Commodities and gold all did three fifths of you know what last night, settling down following the burst of Syria volatility. Spot iron ore lost US10c to US$135.10/t.

The SPI Overnight rose 12 points or 0.2%.

We have jobs numbers in Australia today. Oh no, that means the Treasurer-elect will be on the podium. Myer ((MYR)) and Sigma Pharmaceutical ((SIP)) will release their full year profit results.

Rudi will appear on Sky Business today at noon and again between 7-8pm for the Switzer Report.

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)
 

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