The Overnight Report: Back Into Blue Sky

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By Greg Peel

The Dow closed 74 points or 0.5% while the S&P gained 0.5% to 1854 and the Nasdaq added 0.6%.

Unless you spent yesterday in a coma you probably picked up on the fact Qantas ((QAN)) quantified the extent of its death spiral and handed out 5000 parachutes. Qantas shares took a tumble but only lost half of the gain from the point early in the month when it became apparent the government would do something, whatever that might be, to help.

The Qantas saga no doubt weighed on broader economic sentiment but any attempt to push through previous highs has been thwarted this week, and again yesterday, by weaker iron ore prices impacting on the miners. On Wednesday we had disappointing December quarter data in the form of construction work done and economists were again disappointed yesterday with the capital expenditure and expenditure intentions numbers. Forecasts for the GDP result, due next week, are being trimmed.

In tune with the construction numbers, yesterday’s capex numbers suggested the transition from a mining-led to a non-mining-led economy will not be smooth. Total December quarter capex fell 5.2% when consensus had a 1.3% fall. Mining capex fell 5.5% and non-mining capex fell 4.7%. The idea is for the latter number to rise to offset the inevitable fall in the former. But with manufacturing spending at a decade low, it’s not an overnight expectation.

The first estimate of 2014-15 capex intentions came in at $125bn when $139bn had been forecast. While that does not look enormously bad, CBA economists point out that’s worth one full percentage point of GDP difference. Mining capex looks at this stage like it will fall 17% in 2014-15.

CBA makes two important points. Firstly, the numbers might be disappointing but they are not divergent from the RBA’s expectations, suggesting the central bank’s “on hold” stance regarding the cash rate should not be affected. Secondly, the ABS does not count all sectors in its capex survey. Indeed, it leaves out some large non-mining sectors. Why? Don’t know.

Whatever the case, the local market had more of an excuse than just the Limping Kangaroo to pull back yesterday. The results season proper ends today, and so too will anymore micro-led share price jumps. Bridge Street needs a new compass from here in the near term.

The same appeared to be the case on Wall Street given the broad market S&P 500 was also trying and failing to make new highs this week. But last night the index broke through the barrier and a last minute kick ensured a close into blue sky, thus in theory sounding a bullish signal.

For that we can thank Granma Yellen. Yellen is rapidly taking on the persona of the wise and consoling Granma, and while the Senate Banking Committee has in the past chewed up the odd testifier and spat them out, it was all smiles and manners last night when the new Fed chair took the stand. Yellen’s testimony had been scheduled for last week but it was postponed due to heavy snow.

The point was not lost on Yellen. The weather has dominated economic debate since the last Fed statement so it was about time the central bank chimed in with its own view. It is difficult to tell how much the weather can be blamed for recent apparent economic weakness, Yellen suggested, which by default suggests the Fed also sees the possibility of economic weakness for weakness’ sake. On that basis, Yellen reiterated that the Fed is prepared to make adjustments to policy program if warranted.

In other words, if recent weak data turn out not just to be a snow issue then the Fed is quite prepared to “taper the taper” – stop or ease the purchase reduction program.

That’s just what Wall Street wanted to hear. What became known as the Bernanke Put is alive and well. On that note, and despite an uninspiring read on January durable goods orders, Wall Street pushed higher during the session and triggered technical buying when the S&P 500 crossed 1850.

Stock market strength also belied tensions elsewhere, with other markets taking note of Russian troop exercises on the northern border of the Ukraine while a pro-Russian gunman took control of the parliament in the Crimea. Into the valley of death…

The ruble has been falling as the Ukraine crisis has played out. Meanwhile, the US dollar index drifted slightly last night to 80.31 and gold was steady at US$1329.80. But the US ten-year yield fell another 3 basis points to 2.64%. The Aussie plunged towards the 89.00 level on yesterday’s capex news but recovered to be little changed at US$0.8957 this morning.

Base metal movements were negligible but for nickel, which rose 1.5%. Spot iron ore arrested its slide, for now, with a US20c gain to US$118.00/t.

The oils both fell back around 30-40c to leave Brent at US$108.99/bbl and West Texas at US$102.25/bbl.

The SPI Overnight rose 24 points or 0.4%.

It’s the last day of the local results season proper today (there will be stragglers, and lots of junior miners to come) and we’ll wrap up with another decent round of reports including those from Harvey Norman ((HVN)) and Woolworths ((WOW)).

There’s a lot of data out of Japan today and tonight the US will revise its initial December quarter GDP estimate.

Plans have changed at Sky Business and Rudi will not appear tonight. He'll be back on Monday morning, 11.20am, if plans remain unchanged between now and then.
 

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