The Overnight Report: Green Light From The Fed

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By Greg Peel

The Dow rose 181 points or 1.1% while the S&P gained 1.1% to 1872 and the Nasdaq surged 1.8%.

Houston, we have successfully escaped 5400 and are now in clear space. You’re not going to believe this, but it was thanks to the Seth Effricans.

That’s the thing about markets – the big moves do not come because they’re expected. Before the Australian market opened yesterday there was at least the promise of upside potential. Wall Street had stabilised, and the rebound in the Nasdaq suggested the rolling, tech-led pullback may have run its course. Then after the closing bell in New York, Alcoa posted a strong beat in its March quarter earnings. But if 5400 was to be left behind, the market needed an X-factor.

A takeover bid for David Jones ((DJS)) was never beyond the realms, which is no doubt why, unlike rival Myer ((MYR)), or retail stable mate JB Hi-Fi ((JBH)), DJs has not been sitting with 12% of its capital shorted. Whether or not the department store model is dead in the water, DJs is sitting on a load of valuable property and its rivals are not. But I doubt anyone had Woolworths of South Africa pencilled in. The 25% pop in DJs shares yesterday floated all boats, not just in retail but across the board.

It didn’t hurt that the iron ore price had jumped a dollar, or that Westpac’s consumer confidence index showed a rise of 0.3% to 99.7 for April (albeit the index is still 9.6% below the September election afterglow). Nor that housing finance rose 1.9% in February to be up 20.4% over twelve months, and investment lending rose 4.4% to be up 32.3%.

The ASX 200 yesterday hit a post-GFC intraday high of 5477 and the close of 5463 was still a new high (beating 5462 in March). And it looks like we’re in for more of the same today following the big Fed-led rally on Wall Street overnight. Look out 5500.

Since Fed chair Janet Yellen made her infamous “six months” faux pas last month, she and her FOMC colleagues have been back-pedalling fast. A later speech went a long way to tempering Wall Street fears that the central bank was suddenly a lot more hawkish than was assumed. Indeed, that speech was very dovish. And as last night revealed, the latter speech was in line with FOMC thinking all along. The “six months” call was clearly a brain explosion.

The FOMC had taken a look at the Fed’s own economic projections at the March meeting and become concerned. In December, the projections suggested the Fed funds rate would reach 1.75% by end-2016 (the first hike from zero being expected in mid-2015). By March, the model had shifted that rate up to 2.25%. Were the market to see these numbers, and they are eventually published, it would quite likely crack. And as far as the members were concerned, the projections looked way too optimistic anyway. Thus the minutes of the meeting emphasised the need to qualify the central bank’s own projections with dovish overtones.

And that was all Wall Street needed, in confirmation. It does beg the question as to why the central bank is playing to the markets when the markets should play to the Fed. What it suggests is that the Fed is not going to do anything that might upset the markets, in which case there is little chance of a big drop in the stock indices, beyond healthy pullback levels. So, what’s the point in not buying?

And on that note, the US indices kicked and kicked again to finish at their highs last night. The one percent bounce in the S&P was one thing. The 1.8% surge in the Nasdaq has completely killed off Tech Wreck II fears.

The minutes sent the US dollar index down 0.3% to 79.52. Gold had already bounced back over 1300 so it only gained US$3.90 to US$1312.80/oz. The US ten-year bond yield has fallen this week, so it was steady at 2.68%. All the action was in stocks. The Aussie is 0.3% higher at US$0.9385 and indicating that 94 is quite a wall.

The LME had closed ahead of the release of the Fed minutes. Aside from US monetary policy, metals traders are focussed on today’s trade balance release from China. Realistically the data could be a win/win either way. If the numbers are good, that’s good. If the numbers are bad, that means more stimulus. Aluminium and nickel both jumped 1.8% last night, although some swift selling in copper (down 0.8%), linked to late Shanghai trade, left LME traders scratching their heads.

Iron ore is up another US$1.20 to US$119.40/t.

Talk now is of the anticipated reopening of Libyan oil terminals being delayed, which when added to the continuing Ukraine unrest had West Texas crude up US83c to US$103.39/bbl although Brent was steady at US$107.72/bbl. Note how far that spread has now come in.

Another positive session awaits on Bridge Street, with the SPI Overnight up 40 points or 0.7%. That would put us at 5500.

The Chinese trade data will no doubt have a say in the matter though. As will the Australian jobs numbers for March, due today. The February numbers suggested the Australian economy was booming, much to everyone’s bemusement, so we might just see some correction this time, or next.

Rudi will appear on Sky Business at noon.

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