The Overnight Report: False Alarm

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By Greg Peel

The Dow closed down 266 points or 1.6% while the S&P fell 2.1% as the Nasdaq plunged 3.1%.

Only two days earlier the ASX 200 remained locked in its struggle to break through the 5400 level. Yesterday it briefly kissed the sky at 5503, even before the jobs numbers came out. The ultimate close of 5480 still represented a sudden swing to optimism over a two-day period. Presumably we’ll see that optimism cut off at the knees today.

In February the ABS had changed its model for the monthly jobs survey and warned of a statistical hiccup, which was duly delivered in the form of a 48,000 job increase which no one believed. The unemployment rate hit 6.0% nevertheless, but economists were mostly all assuming that yesterday’s March number would correct the hiccup, and the unemployment rate would rise to 6.1%.

Well they were wrong. The unemployment rate for February was actually revised up to 6.1% but in March it plunged to 5.8% on the addition of yet another 18,000 jobs. There was another tick down in participation, but otherwise the numbers left everyone confounded. The manufacturing states of Victoria and SA did see losses, but WA and Queensland are holding their own despite the mining downturn and NSW is powering ahead. Despite all the scratching of heads, it has to be noted that the ANZ jobs ads series has been on the way up and this month the ANZ economists noted a historical pattern that predicts the unemployment rate must fall. They were right.

The impact of the jobs number was to send the Aussie crashing up through resistance at 94 without a blink. The currency peaked at 94.6 immediately after the jobs release, before drifting off and then falling further in last night’s trade. Over 24 hours the Aussie is up 0.2% to US$0.9406.

Aside from meeting a new resistance level at 5500, the market took pause to ponder the implications of an Aussie now some 6c above its recent lows, and in particular how that might impact on commodity exporters. BHP Billiton ((BHP)), for example, finished the session down 1.3% despite a US$1.20 rise in the iron ore price. The big miners start reporting their production and sales numbers next week for the March quarter and there is likely to be an impact felt in realised prices, which at this early stage is looking even worse for the June quarter.

Then came the Chinese trade data. On first glimpse they looked good, given China’s trade balance rose to a surplus of US$7.7bn in March, representing a big swing from February’s deficit of US$23bn, and ahead of forecasts for a US$1.75bn surplus. But the underlying elements were not all that flash. Exports fell 6.6% (year on year), which was better than February’s 18.8% fall but well short of expectations for a 4.2% gain. Imports were worse, falling 11.3% compared to February’s 10.1% drop, but nowhere near forecasts for a 2.8% gain.

Economists had to a great extent dismissed the February data as representing the annual statistical glitch that is the lunar new year holiday. They thus expected a turnaround in the March data, but have been forced to acknowledge that prior to the recent government clampdown, Chinese export data were forever being exaggerated by “over-invoicing”, a trick used at the provincial level to make that particular province look good to attract more national funding. Somewhere in all of this is “the new normal”, but we may have to monitor further data in the months ahead to truly gauge the “real” story.

So the ASX200 closed off its highs but still looked pretty healthy, having decided the latest Wall Street mini-correction was over for now. Oh dear.

I have said it many times now, but it is always important to note that the “smart money” never responds immediately to any Fed event – particularly a policy statement but also the release of the minutes of a meeting – but rather lets the headless chooks run wild, sleeps on it, and comes back the next day with a relevant trading strategy. On Wednesday night the chooks decided the Fed had become a lot more dovish than it was a month ago. The smart money knew that in actual fact, and despite Janet Yellen’s earlier blooper, Fed policy has not changed at all this year and indeed has not changed since those hazy, crazy days of Uncle Ben.

So why the sudden excitement? What the Fed was really saying at its meeting is that it doesn’t think the US economy is really recovering as quickly as forecasts are suggesting. That is actually not good news. So a day later, it was back to correction mode. From the higher starting point afforded by Wednesday night’s rally. And once again, the “momentum” plays were trashed. Really trashed. Biotech, social media, general internet. Everything from drug developers to Facebook and Amazon. Even with Wednesday night’s brief bounce, the Nasdaq is down 7% this month. Over a quarter of the Nasdaq 100 is down 20% or more for the year.

But this was no wholesale sell-off, and nor was it earlier in the week. Volumes have not been substantial, suggesting a lack of buyers rather than an avalanche of sellers, and the switch is on into the large-cap, less exciting stocks. Dow names like IBM, Microsoft, McDonalds, Caterpillar, Proctor & Gamble, AT&T – these stocks have largely maintained their support while all about them is losing theirs. Fuelling the weaker Dow are the banks, such as JP Morgan who reports tonight, along with consumer discretionary and, funnily enough, healthcare. Healthcare had been on a tear since last year.

The switch was also on back into bonds, with the US ten-year yield falling 6 basis points to 2.63%. The US dollar fell 0.1% to 79.43 as it continues to give up ground to the euro. Strange – the ECB is talking about introducing QE and the Fed is quietly reducing it. Gold rose US$5.80 to US$1318.60/oz.

Base metal markets were a standout last night. The LME closed ahead of the release of the Fed minutes on Wednesday night so last night was the first chance to respond. What LME traders saw was a weaker US dollar on Fed dovishness. And they also saw a Chinese trade surplus that was a lot bigger than forecast. So they bought the metals. Copper and tin remained stagnant but zinc rose 1%, and the recent stars surged further, with aluminium up 1.6% and nickel up 2.4%.

Spot iron ore fell US30c to US$119.10/t.

The oils were quieter, with Brent easing US26c to US$107.47/bbl and West Texas US25c lower at US$103.35/bbl.

For the ASX 200, it looks like 5500 is just going to have to wait for another day. The SPI Overnight fell 51 points or 0.9%.

Bank of Queensland ((BOQ)) will report its interim earnings today and China will release March inflation data.
 

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