The Overnight Report: Putin Softens

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By Greg Peel

The Dow closed up 117 points or 0.7% while the S&P gained 0.6% as the Nasdasq lost 0.3%.

Two points to note about the 45 point sell-off on Bridge Street yesterday are that volume is very thin ahead of next week’s budget and that the ASX 200 was down 64 at its worst. Often these big sell-offs snowball to close on the lows, so some buying support was found in the afternoon.

Another point to note is that for some strange reason the market seems to religiously respond to monthly fluctuations in the retail sales numbers when quite frankly the series is a joke. The ABS samples a small set of bricks & mortar retailers and the following month moves to a different set (outside a few large retailers). No wonder the series is volatile, and no wonder it ultimately bears little correlation to the quarterly consumer spending component of the GDP number which samples a much larger set and includes online sales (but thus admittedly takes quite a while to publish).

Having blown the market away the previous couple of months with surprising strength, yesterday the retail sales number shocked everyone with disappointing weakness. Sales, supposedly, rose only 0.1% month on month when 0.4% was expected. Fortunately yesterday’s release also included the quarterly summation, which saw volumes rising 1.2% quarter on quarter and prices rising 0.8% to provide 5.7% year on year growth in sales (by value), riding on the coat tails of the house price surge.

Little to be concerned about there, but having opened down 20 points the ASX 200 freaked out on the retail sales release and plunged straight to its lows. Yet by the time the dust had settled at 4pm, we did see the consumer sectors down but bigger falls were felt in materials and telcos and similar falls in banks and healthcare. Info-tech crapped itself, but barely moves the index dial. There was more of a rush to get out of iron ore stocks, despite the iron price having stabilised for the moment.

HSBC’s China service sector PMI came in at 51.4, down from 51.9. No great panic there.

All will be forgiven today, perhaps, given the Dow has regained what it lost on Tuesday night and the SPI Overnight jumped 28 points or 0.5%. But the iron ore price is down US90c to US$105.10/t.

The Dow jumped 76 points from the opening bell last night after news came through Vladimir Putin had told his troops to withdraw from the Ukrainian border in line with international demands and called for a delay to Sunday’s planned Ukrainian referendum. It seems even Vlad can now see little upside in an all-out Ukrainian civil war and potential sanction expansions that could ultimately cripple the Russian economy. Meanwhile, the Pentagon called on Ukrainian troops to halt operations against pro-Russian activists.

The relief did not last long on Wall Street, with markets suddenly being slapped and the Dow dropping quickly to be down 44. March quarter US productivity was shown to have fallen 1.7% against expectations of a 1.1% fall but this is another snow story and was not the real driver of weakness. The real driver was a continued assault on the Nasdaq and momentum names, led by further selling in Twitter.

The cavalry soon arrived for the broader market when Granma Yellen fronted the Joint Economic Committee of Congress. The Fed chair acknowledged the harsh winter and suggested economic growth would rebound but also expressed concern over a slowing in the housing recovery. If the rebound panned out as expected, QE tapering would end as planned, but when pressed on the first rate rise Yellen (with her “six month” furphy still lingering) insisted “there is no mechanical timetable”.

Such talk is like a speedball to an addict, so the Dow shot up to close 117 higher on the day. The Nasdaq had been down 1.4% at its depths but managed to recover to its close down 0.3%.

The US bond market is not swayed by Granma’s pleasantries and the ten-year yield remained unmoved at 2.59%. The US dollar index regained some of Tuesday’s loss in rising 0.1% to 79.24 while the Aussie fell 0.3% to US$0.9328, having not read too much into the weak retail sales number.

The LME closed last night ahead of Putin’s troop withdrawal, with traders still fearing further escalation. Traders were also squaring ahead of today’s Chinese trade balance release in selling base metals, including aluminium, copper and zinc by around 1%. Nickel rose yet again, but now includes a premium for the potential of sanctions against Russia to impact on Russia’s significant nickel exports.

Any de-escalation in Ukraine should, in theory, take a premium off oil prices as well but last night’s weekly US inventory report showed, OMG, a big fall back from the record supplies of the week before. (You reckon Oz retail sales numbers are volatile? US weekly crude inventories are hilarious.) West Texas thus jumped US$1.29 to US$100.79/bbl and Brent followed with a rise of US$1.10 to US$108.12/bbl.

So more fun and games are likely on the local market today, with Chinese trade balance lining up with the local jobs numbers (another roulette wheel) and National Bank’s ((NAB)) interim, all in a thin pre-budget market. We also have results out from News Corp ((NWS)) and friend ((FOX)) and AGMs being held by AMP ((AMP)) and Rio Tinto ((RIO)) among others.

Rudi will appear on Sky Business at noon.
 

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