The Overnight Report: No Deal

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By Greg Peel

The Dow fell 133 points or 0.9% while the S&P lost 0.7% to 1698 and the Nasdaq dropped 0.4%.

From the RBA minutes:

“The information to hand at the meeting was consistent with growth of economic activity remaining below trend over the next year or so before an expected pick-up. Inflation was expected to be consistent with the target over the next one to two years. Members noted two developments over the past month, namely the appreciation of the exchange rate and the pick-up in measures of both consumer and business confidence over recent weeks. It was difficult to know how significant the effects of either of these developments would be, partly because it was uncertain whether they would be sustained.”

The RBA was on the horns earlier this month. The noted pick-up in confidence provides reason not to need to cut the cash rate further but the currency is just not playing ball. Like everyone else, the RBA board is uncertain of developments in the US, noting:

“In the United States, market reaction to the decision by the Federal Reserve not to scale back the rate of its asset purchases, together with the more positive Chinese data, saw the Australian dollar appreciate over recent weeks, although on a trade-weighted basis the exchange rate remained around 10 per cent lower than in April.”

And the board is thus uncertain as to whether the post-election green shoots in Australia prove merely to be just a honeymoon. Hence:

“The Board's judgement was that, given the substantial degree of policy stimulus that had been imparted, it would be prudent to leave the cash rate at the existing low level while continuing to gauge the effects. Members agreed that the Bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them. The Board would continue to examine the data over the months ahead to assess whether monetary policy was appropriately configured.”

There are still those suggesting one more rate cut, maybe early next year, and even the odd call for two. But the majority has decided it best to assume the RBA easing cycle is now over and it’s time to look ahead to just when the first rate hike might come. That should not be a scary prospect, given the Australian economy would have to look a lot healthier to induce a rate hike and the US will have to have sorted itself out, allowing the greenback to appreciate and the Aussie to depreciate.

The US sort itself out? The global superpower has become the global joke. It’s no surprise the Chinese have seized the opportunity to denounce the US dollar as a viable reserve currency, but then one might be tempted to ask: who’s lending them the money? Trillions of it.

So we bungle on, shaking our heads in bemusement as the charade continues to play out in Washington between basically the Tea Party idiots and everyone else. There is even talk one or two Tea Party extremists might put down their banjos for long enough to try to filibuster ahead of the debt ceiling deadline, so intent are they that a calamitous US default is the only way to get their God-fearing point across and save America from hell.

Most observers continue to shrug, noting last minute resolutions are standard procedure. Then both sides claim victory. The clock is ticking, nevertheless. A weary and wary Wall Street decided it prudent to take some of last week’s gains off the table last night just in case, and to buy some protection. The VIX rose 15% to 18.5 and the US ten-year bond yield – back in the game after Monday night’s holiday – added 3bps to 2.72. Gold rallied back US$6.50 to US$1282.90/oz despite the US dollar index rising 0.3% to 80.50.

Last night the Republican Senate leader put a bill proposal to the Republican Senate leader that leaves Obamacare alone but removes the extraordinary measures the Administration can use to tide America over around debt ceiling deadlines. No thanks. The proposal extends the debt ceiling deadline to February but reopens the government only until December 15. No thanks. The bill will pass through the Republican controlled House but not the Democrat controlled Senate.

Tick, tick, tick.

There was actually some US economic data out last night, courtesy of the New York Fed. The Empire State manufacturing index fell to 1.5 from 6.3 last month, when economists had expected 7.0. The concern now is just how much damage, to confidence as well as the immediate bottom line, the government shutdown is causing.

Base metals continue to bounce around mindlessly in London as the whole world watches Washington. Aluminium fell 1% last night and copper was flat.

Talks are underway in Geneva between Iran and the US, Russia, China, France, Britain and Germany with regard to Iran’s nuclear program. This is seen as a positive in the geopolitical stakes, hence a negative for oil prices. Brent fell US$1.19 to US$109.61/bbl and West Texas fell US$1.47 to US$100.94/bbl.

Spot iron ore was unchanged at US$133.60/t.

After yesterday’s solid, resolution-confident gain on Bridge Street, the SPI Overnight closed down 16 points or 0.3%.

BHP Billiton ((BHP)) and Iluka Resources ((ILU)) will release their quarterly production report today while CSL ((CSL)) will feature among companies holding AGMs.

Tonight in the US the Fed will release its Beige Book and the NAHB its housing sentiment index but there will be no CPI release as scheduled.

Rudi will not appear on Sky Business this evening as he did already yesterday late. He will appear next on Thursday (noon).
 

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