The Overnight Report: Now What?

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By Greg Peel

The Dow closed down 30 points or 0.2% while the S&P was flat at 1819 and the Nasdaq added 0.1%.

Bridge Street opened to the upside in line with Wall Street yesterday but once again received a midday data kicker to ensure another solid gain by the close. On Tuesday the kicker was a turnaround in Australian business confidence. Yesterday the kicker was not a local issue, as indeed the Westpac consumer confidence survey showed a 3% fall in confidence this month to its lowest level since May last year. Rather, the kicker was all about China.

Economists had expected Chinese exports to grow by a mere 0.1% (year on year) in January, following a 4.3% gain in December. The lead-up to Chinese New year typically sees a downturn in trade. But Beijing announced exports rose 10.6%. Really? Imports rose 10.0% and China’s trade surplus increased by 14%.

Official and unofficial (HSBC) PMI surveys in January showed China’s manufacturing sector contracting in January for the first time in many months and China’s services sector slowing its rate of expansion. China’s GDP grew by 7.7% in 2013 and is forecast to slow to 7.5% in 2014. Yet somehow China managed explosive export growth in January.

Chinese merchants are known to boost trade numbers with the support of provincial governments in order to remain in favour with Beijing. Tricks like over-invoicing and “round-tripping” of goods lead to over- and double-counting of trade numbers. The bottom line is that China’s export/import numbers can be cross-checked against the corresponding import/export numbers of the country’s major trading partners, such as Taiwan and Korea. Strangely enough, those countries recorded very weak numbers in January.

But Bridge Street liked it anyway.

Wall Street liked it too, but after four days of rallies decided it was time for a breather. Wall Street also liked the news from across the pond that the Bank of England had raised its 2014 GDP growth rate forecast for the UK economy to 3.4% from 2.8% and that it expects January jobs data to show a fall in the unemployment rate to 7% — two years earlier than originally forecast.

These are significant upgrades, but in the UK’s case recent economic data provide support. Prime Minister Cameron, speaking through a snorkel, was very happy. Interestingly, the BoE echoed the Fed in suggesting that it would not begin raising interest rates based simply on an unemployment rate trigger – which previously was set at 7% — but would rather make a broader assessment of the UK labour market. Central banks around the world have quickly back-pedalled from the concept of using unemployment rate targets in policy guidance.

One might suggest unemployment rates, as presently calculated, are an anachronism.

Wall Street was also happy that a day after Fed chair Janet Yellen donned a Ben Bernanke mask, St Louis Fed president James Bullard suggested he was still optimistic about the US economy and believed 3% GDP growth was achievable.

Yellen will be back again testifying tonight, this time in front of the Senate Banking Committee, which is expected to be a bit more inquisitive.

The pound jumped against the US dollar last night but all up the dollar index held its ground at 80.69. The Aussie is off a tad to US$0.9029, while gold is steady at US$1292.10/oz.

The LME was quite excited about the Chinese trade numbers. In particular, China supposedly imported 536,000 tonnes of copper in January, up 53% from last January, and only the second time in history Chinese copper imports have exceeded 500kt in a month. The copper price managed only a 0.6% gain nevertheless in a session which saw average 1% gains amongst the other metals.

Both the oils were a little more positive last night, with Brent up US26c to US$108.79/bbl and West Texas up US31c to US$100.25/bbl.

Spot iron ore rose US$1.00 to US$121.00/t.

Bridge Street looks keen to get on with it today, with the SPI Overnight up 9 points.

Aside from the spurious Chinese numbers, Bridge Street also found support yesterday from a batch of mostly positive corporate earnings results. Boral ((BLD)), OZ Minerals ((OZL)), Domino’s Pizza ((DMP)) and Carsales.com ((CRZ)) were among the big winners with CommBank ((CBA)) satisfying, albeit CSL ((CSL)) and Goodman Fielder ((GFF)) disappointed.

It’s another solid schedule today, led out by Rio Tinto ((RIO)) and Telstra ((TLS)) along with the likes of Transurban ((TCL)) and ASX ((ASX)) among many more. David Jones ((DJS)) will also release its December quarter sales numbers.

And today sees Australia’s January unemployment numbers. See above for relevance.

Rudi will appear on Sky Business at noon.
 

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