The Overnight Report: Corrections Are Not An Option

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By Greg Peel

The Dow closed down 20 points or 0.1% while the S&P lost 0.3% to 1762 and the Nasdaq rose 0.1%.

I backed a horse at ten to one. It came in at half past four.

Bridge Street leapt from the open yesterday, for reasons known only to itself. Perhaps Monday’s weakness suggested anticipation of a fall on Wall Street following various Fedhead comments of limited usefulness, and Tuesday’s opening reflected a lack of fall. Or perhaps an increase in the Australian services PMI to 47.9 from 47.1 in September provided a spark. Either way, once a level had been established from the get-go, there the index stayed on paltry volume for the rest of the session as the bubbles were handed around.

HSBC’s China services PMI came out late morning, showing a gain to 52.6 from 52.4 (the official reading, released on the weekend, showed 56.3 up from 55.4), but Bridge Street had already established its position by then, and the chicken salad was being brought out.

At 2.30pm we had the decision that stops a nation but no one was surprised when the RBA left its cash rate unchanged at 2.5%. There was very little in the accompanying statement that was different to the October statement, except for Glenn Stevens’ comments on the currency. In October, Stevens said:

“The Australian dollar rose recently, but is still about 10 per cent below its level in April. A lower level of the currency than seen at present would assist in rebalancing growth in the economy.”

Yesterday, Stevens said:

“The Australian dollar, while below its level earlier in the year, is still uncomfortably high. A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy.”

A certain note of frustration has crept into Martin Place. Last month a weaker Aussie was desired to “assist” a balanced economy, but this month a weaker Aussie is “needed” for a balanced economy. One wonders just what the RBA can do, given there seems little likelihood the Fed will taper anytime soon, despite unhelpful Fedspeak. We do not want the Aussie to “go down” per se, as that would imply a weaker economic outlook (perhaps because of Chinese slowing). And with asset prices on the run, talk has swung towards just when the RBA might raise, rather than cut, its cash rate. What we want is the for the US dollar to “go up”, thus affecting a weaker Aussie.

The greenback actually has been more up than down of late on its index, given (a) the last FOMC statement did not rule out a December taper and (b) the euro has been weak on deflation fears. Last night the European Commission trimmed its 2014 eurozone GDP growth forecast to 1.1% from 1.2% and warned growth in Europe will remain subdued and risk will remain elevated. The EC’s unemployment rate forecast for 2014 was lifted to 12.2% from 12.1%. The euro fell once more.

The Fed may not have explicitly ruled out December tapering, but few really expect any change in policy in the handover to Yellen, and then few expect Yellen to do anything other than maintain a low interest rate policy for as far as the eye can see. Yet the US bond market does not appear to be seeing it that way. The benchmark US ten-year yield had been steady at 2.50% following the last FOMC meeting, but it is suddenly now sitting at 2.66%, including a 6 basis point gain last night. What we might be witnessing in the bond market is another train of thought – one that has the Fed deciding to go ahead and taper anyway irrespective of the data because asset inflation is becoming a concern and QE3 does not seem to be achieving anything. The longer the Fed stays in, the harder it will be to get out.

The US services PMI came in at 55.4 last night, up from 54.4 in September and reversing the fall to September from August. This seemed to be enough to turn Wall Street around, which had fallen sharply from the opening bell, to the tune of 117 Dow points. The EC forecast downgrade was used as an excuse to take profits from the open, with worry creeping in over just how far Wall Street has run in 2013. But the indices grafted back to the flatline by lunchtime and the S&P closed only marginally weaker.

The UK services PMI rose to 62.5 from 60.3.

US stocks recovered initial lost ground last night and bond yields rose, but elsewhere nothing much was happening. The US dollar index is up 0.2% to 80.71 and the Aussie is down 0.2% to US$0.9495. Gold is US$4.30 lower at US$1311.20/oz. Base metals prices barely moved in London.

The oils were nevertheless weaker again, with Brent down US87c to US$105.36/bbl and West Texas down US$1.24 to US$93.38/bbl. Spot iron ore remains on a tear, up another US$1.00 to US$136.80/t.

After yesterday’s solid run, the SPI Overnight lost 5 points.

Australia’s trade balance is out today while Commonwealth Bank ((CBA)) will provide a quarterly update, as will 21^st Century Fox ((FOX)), and Downer EDI ((DOW)) will hold its AGM.

Rudi will appear on Sky Business from 5.30pm.
 

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