The Overnight Report: The Lady Of The Fed

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This story features BANK OF QUEENSLAND LIMITED.
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The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed up 26 points or 0.2% while the S&P gained a point to 1656 as the Nasdaq fell 0.4%.

The president’s appointment of Janet Yellen as the first woman to chair the US Federal Reserve has largely been expected since Larry Summers withdrew his candidacy but not completely assured given Obama was believed to have been favouring Summers initially. Nevertheless the news came through yesterday in the Asian time zone, after Wall Street’s close, that Yellen was indeed to be confirmed.

Yellen, former vice chair to Bernanke, is seen to be a “Bernanke clone” and far more pro-stimulus than the more hawkish Summers would have been. In other words, the QE train is likely to keep rolling on longer and tapering perhaps delayed for the time being. The shutdown provides an excuse to hold off on tapering anyway.

Yellen is also seen as pro-communication, and her appointment speech confirmed she will be more pro-active in offering forward guidance on Fed policy intentions. Bernanke started the guidance thing but in the end failed miserably, letting the whole world assume tapering would begin in September.

When news of the appointment came through after the bell on Wall Street on Tuesday night, the Dow futures jumped. This provided an indicator for Asian markets, including Bridge Street, that last night’s trading may well be a little more positive than it has been recently. Thus despite a 37 point fall in the SPI Overnight on Tuesday night, the ASX 200 was able to recover initial losses to trade into the green yesterday. Another resilient display.

Westpac’s consumer confidence index for October nevertheless seemed disappointing at face value on a 2.1% fall, given the strength of the NAB business equivalent, but Westpac economists described the result as “solid”. Firstly, while the NAB survey caught the election relief late in September, the Westpac survey was conducted in the first week of October at which point the initial election response had eased off, the US went into shutdown, stock prices fell and the Aussie rose.

Westpac’s previous survey had showed a very positive 4.6% bounce in consumer confidence, hence this consolidation, to an index level of 108.3, still reflects what the economists descried as a positive trend.

It wasn’t all smooth sailing for Wall Street initially last night given the indices dropped on the release of the Fed minutes early in the session. The minutes confirmed what everyone had originally thought, being that most FOMC members were keen to begin tapering before year-end. But is that still the case? We still don’t know how long the shutdown will last and then there’s the debt ceiling, which is more likely to be temporarily raised pending ongoing negotiations than raised by consensus next week, which will influence monetary policy. And although Yellen doesn’t officially begin until next year, no doubt Bernanke will politely play lame duck from here. Yellen is the more dovish.

Wall Street rebounded, but a possible glimmer on the Congressional negotiation front, with John Boehner and Republican leaders planning to meet with the president, also provided some hope. But nothing is certain and a 78 point Dow increase at 3pm eroded by the close.

The US dollar nevertheless jumped on the release of the minutes, given the quicker tapering begins the quicker the greenback will rally. A 0.5% increase in the dollar index to 80.37 was also helped by a sharp fall in the pound. The pound had become overbought on positive UK data of late so one weaker reading on factory output brought in the sellers.

The dollar bounce knocked gold down US$11.10 to US$1307.70/oz but the Aussie is yet again a tad higher at US$0.9443. Copper fell 1.6% and posted the worst session of the metals, which were all down bar aluminium.

The oils took a beating for once, with Brent down US$1.18 to US$108.95/bbl and West Texas down US$2.02 to US$101.47/bbl. It was not just the dollar, but a weekly US inventory result showing three times more crude on hand than forecast. I think Moses was the last person to correctly forecast weekly US oil inventories.

Spot iron ore rose US10c to US$131.80/t.

The SPI Overnight has become interesting. For the last few sessions it has indicated weak starts, only to be shown up by resilience in the ASX 200. They were still at it again last night nevertheless, selling the SPI down 23 points or 0.5% despite a flat Wall Street. Perhaps what we are seeing is related more to a closing of the futures premium over the fair value of the forward index rather than an absolute directional call.

The local unemployment numbers are out today, which might be interesting in the context of the rebounded Aussie. Bank of Queensland ((BOQ)) will release its full-year result.

Rudi will not appear on his usual time slot on Sky Business today at noon.
 

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