The Overnight Report: Nothing To Fear

This story features METCASH LIMITED. For more info SHARE ANALYSIS: MTS

By Greg Peel

The Dow closed up 108 points or 0.7% while the S&P gained 0.6% to 1872 and the Nasdaq added 0.3%.

It was a cascading sell-off on Bridge Street yesterday which, by the close, really had little to do with fundamentals. The negative reaction on Wall Street to Janet Yellen’s hawkish suggestion (faux pas?) that the first rate rise in the US could occur as soon as six months after tapering ended provided the initial impetus to sell, but it was the number 5300 which made all the difference. It was expiry day yesterday for the SPI and SPI options and XJO options and the ASX 200 homed in on the 5300 strike where large options open positions clearly lay. That price has proven a significant support/resistance technical level for some time.

Weakness was likely also helped by ongoing suggestions that PEs have risen too far for many stocks, but the sell-off was largely indiscriminate on a sector basis with the large caps all suffering, further suggesting the rapid unwinding of futures arbitrage positions as the SPI continued lower. Either way, it was not a session which suggests the end of the world is nigh.

If any market had an excuse to head lower last night it was Wall Street, which for years now has feared the first Fed rate hike from the longstanding zero level. We recall nostalgically the old “good news is bad news” period when the world was upside down over QE and interest rate policy. So even if Yellen should have said something more vague with regard to the first hike, such as “six to twelve months or so”, last night it seemed Wall Street decided the news must ultimately be good. Rates only rise when the economy is strong and let’s face it, Wall Street has been preparing for this day for some time now.

The stock indices began to fall from the opening bell but were quickly turned around by some positive data releases, and that’s the way it should be. Data are what the Fed will be watching so if traders now see good news as good news, then finally the world may have righted itself and artificial support systems can be quietly switched off.

The Philadelphia Fed manufacturing index rebounded this month to plus 9.0 from February’s minus 6.3 which at the time was attributed to snow. The Conference Board’s leading economic index showed a 0.5% rise in February after a 0.1% rise in January and 0.1% fall in December.

The downer was existing home sales, which fell 0.4% in February and have reached the slowest rate of growth since July 2012. Rising mortgage rates and rising house prices have been blamed for the slowdown but we might suggest this is just a market reacting “normally” and self-dampening instead of bubbling. Many have feared renewed property and stock market bubbles driven by QE.

The US dollar index has spent a long time stuck in a rut when all and sundry had assumed, from early 2014, it must rise on QE tapering. But the Dixie jumped 0.8% on Wednesday on Yellen’s performance and another 0.2% last night to 80.20. Perhaps now the tethers have been cut.

The US bond market decided it had made its move on Wednesday night and the ten-year remained steady at 2.78%, while gold also arrested its interest rate-related slide and was relatively steady at US$1328.00/oz. The Aussie has also stopped dead at US$0.9040, perhaps wondering what to do next. The good news is that if we assume the RBA is on hold and China is not about to implode in a credit crunch, a stronger greenback will naturally push the Aussie down for the right reasons.

The bad news is a stronger greenback works against dollar-denominated commodity prices.

Base metals saw a short-covering rally ahead of the Fed statement and press conference, no doubt as a square-up against what many assumed might be a more dovish tone from the central bank, perhaps using the weather impact as an excuse to slow up the pace of tapering. What we got of course was completely the opposite, and given the LME closed ahead of the press conference it was last night’s session which provided the response. All metals were hit, including a 2% fall in copper and even a 3% fall for the recent star nickel, which had been enjoying a boost from Indonesian export bans.

It was expiry day last night for West Texas crude, hence the April contract closed to make way for a May delivery front month. Expiry saw WTI down US99c to US$0.93.38/bbl when Brent rose US40c to US$106.27/bbl.

Spot iron ore rose US20c to US$110.70/t.

The SPI Overnight, for which the bellwether is now the June contract, rose 21 points or 0.4%.

To continue on the expiry theme, tonight in the US is “quadruple witching” which refers to the expiry of stock and stock index options, index futures and index futures options. Non-fundamental volatility is also on the cards for Wall Street tonight.

Locally, the market will be keen to hear what Metcash ((MTS)) has come up with to stave off the steady decline, as it holds a strategy update.

Rudi will appear on Sky Business' Your Money, Your Call – Bonds vs Equities tonight between 7-8pm.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms