The Overnight Report: Correction Talk Rekindled

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By Greg Peel

The Dow fell 166 points or 1.0% while the S&P lost 1.1% to 1845 and the Nasdaq dropped 0.9%.

Earlier predictions that Australia’s unemployment rate would rise to 6.5% during the hole in the economic cycle between the peak of mining investment and the recovery of non-mining investment may well prove overly pessimistic. Once again we were reminded yesterday that high profile job losses make for sensationalist news coverage but low profile job additions fly under the radar.

ANZ’s job ads series showed a 1.4% increase in March following the big 4.7% jump in February. While ANZ itself admits seasonal adjustments are difficult at this time of the year, ads are trending higher by 1.0% per month and are now only 3.7% below a year ago. Ads have been trending higher for five months in a row which ANZ notes has historically been a reliable indicator that the next interest rate move is up. ANZ is currently predicting no change in rates in 2014 and a total of four hikes in 2015 to 3.5% from the current 2.5%.

“Importantly,” says ANZ, “there has been strength in job advertising in some key industries, including construction, education and health, as well as in the most populous [non-mining] states of NSW and Victoria”.

Australia’s construction industry nevertheless continues to contract, albeit the pace of contraction slowed in March. The construction PMI rose to 46.2 from 44.3 in February. There is still a long way to go before the pace of expansion in non-mining construction can rise to offset the pace of contraction in mining construction.

These data helped Bridge Street put up a resilient show yesterday in the face of the big sell-off on Wall Street as bargain hunters jumped in below the 5400 level on the ASX 200. While one might argue the rout in US momentum sectors such as biotech and internet-related is somewhat remote from Australia’s index make-up (see: Tech Wreck 2000), the local market was not without similar casualties yesterday in high flying momentum names such as REA Group ((REA)) and Donaco International ((DNA)).

Last night Wall Street had little to go on in terms of economic data and ahead of tonight’s Alcoa report which kicks off the US earnings season. But the rout continued, and appears last night to have simply fed on itself. Not helping sentiment in the stock market was another rally in bonds and the technical analysts were in a lather when the 50-day moving average on the US ten-year yield crossed over the 200-day moving average to suggest an infamous “death cross”. The rally in bonds matched the fall in stocks as analysts raced for their Ouija boards to see what might happen next.

The ten-year yield fell 3 basis points to 2.69% and the stocks indices continued their downward trajectory. A nadir was hit around 2.30pm when the Dow was down 168 and the Nasdaq down 1.6% before suddenly the cavalry came over the hill. By 3.30pm the Dow was only down 100 points and the Nasdaq had recovered half its intraday loss. Talk was perhaps of a bottom in this sell-off having been found but alas, the Dow tanked again to the close. The Nasdaq did manage to hold up a bit better however.

The US dollar index began to feel the pain last night in falling 0.3% to 80.23 but this provided no help to gold, which met resistance after rising above 1300 on Friday night and fell back US$7.20 to US$1297.50/oz. Similarly, the 93 level is proving a barrier for the Aussie which has fallen back 0.2% to US$0.9268.

China was on holiday yesterday to celebrate the first ABC broadcast of Q&A from Shanghai (riveting stuff, grab it on iView if you missed it) so it was all quiet on the LME. Copper managed a 1% gain on low volume. Despite the break, iron ore jumped US$1.50 to US$117.20/t.

Following negotiations, four oil terminals at two ports in Libya that have been occupied by rebels for no less than eight months will slowly be reopened. This news was enough to send oil prices lower, although it has been anticipated. Brent fell US47c to US$106.08/bbl and West Texas fell US44c to US$100.70/bbl. Oil markets remain cautious nevertheless. Last night pro-Russian protesters stormed government buildings in two of Ukraine’s larger eastern cities demanding their own referendum, a la Crimea, in the most notable escalation in tension in a month.

The SPI Overnight fell 18 points or 0.3% which suggests another session hovering around that 5400 magnet.

On Wall Street, talk is once again of “correction”. It is well known a correction (10% fall) is well overdue if history is any guide, so every time the S&P loses a few percent (in this case, 2.5% from the all-time high set last week) traders shout “Here it comes!” The problem is corrections only occur when no one expects them to occur.
 

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