The Overnight Report: Now What?

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By Greg Peel

The Dow closed up 19 points or 0.1% while the S&P was flat at 1897 and the Nasdaq fell 0.3%.

Oh the pain, the pain.

Moving on, one might have reasonably expected a quiet day on Bridge Street yesterday ahead of the most anticipated budget since federation but the action on Wall Street on Monday night was too tempting to ignore. A new high for the S&P and snap-back rallies for momentum/small-cap stocks hinted of a return to a more positive tone, and so it was the ASX 200 exploded from the opening bell and hit its high in the first half hour. One might assume the market had decided the bulk of budget evils had already been sufficiently previewed.

Then there was the small matter of China’s monthly data dump to absorb. Here are the numbers:

 Chinese industrial production rose by 8.7% in the twelve months to April, down from 8.8% in March and below 8.9% expectation. Retail sales rose 11.9%, down from 12.2% and below 12.2% expectation. Fixed asset investment rose 17.3% year to date, down from 17.6% last month and below 17.7% expectation. Home sales year to date fell 9.9%, having fallen 7.7% in the year to March. Property investment rose 16.4% to April having risen 16.8% to March.

Put it altogether and Beijing’s 2014 growth target of 7.5% is looking optimistic. Add in last week’s surprisingly week Chinese inflation read, with CPI falling to 1.8% annualised from March’s 2.4%, and it is clear the government will have to pump up the volume when it comes to targeted stimulus.

Which is a sufficiently comforting thought for the Australian market, hence the ASX 200 held onto the bulk of its early gains by the close. Then at 7.30, the streets fell silent.

On the basis of the speech itself and half an hour of ABC analysis, I’d posit that there were no bombshells. Retailers will be despairing, but they’ve been steeling themselves for the worst for a month. Biotech's might have popped the odd cork. The numbers will be dissected in their minutiae all week but the market will sail on.

And the ASX 200 is back up against the 5500 wall. Last night the S&P 500 snuck over the 1900 mark briefly, early on in the session, before pulling back to the previous intra-day high level of 1897. From a technical perspective, Wall Street is poised. What would not been encouraging was the failure of the aforementioned snap-back rally to persist. The Nasdaq eased 0.3% but the Russell 2000 small cap index, which bounced 2.5% on Monday, fell back a full 1.1%.

Emblematic of why Wall Street is sitting at all-time highs but no one feels any particular excitement is last night’s US April retail sales result. After US consumers spent the first two months of the year trapped behind the six feet of snow blocking their front doors, the March thaw saw frantic catch-up spending to mark a 1.5% increase in sales – the highest in four years. Economists were expecting the numbers to even out in April to a 0.4% increase, so the 0.1% result was a disappointment. Not disastrous, but more grist for the mill of the non-believers in the GDP surge-back story.

Understandable, thus, that the US ten-year bond yield would fall back 4 basis points to 2.62%. The US dollar index, by contrast, rose 0.3% to 80.12, but only because of weakness in the euro. The euro was weak because the German ZEW investor sentiment survey fell for the fifth straight month to the lowest level in a year. More fodder for the ECB easing argument.

Gold was steady at US$1294.70/oz.

I fondly remember the days in the dealing room when the Aussie would fly all over the place with every word Paul Keating uttered in his budget speech, but back then nothing was ever leaked beforehand. The Aussie has been on hold for days, and last night’s reaction was a sum total of…still on hold, at US$0.9352.

The suggestion from Access Economics last night (on ABC TV) was that Joe’s no-gain-share-the-pain budget was worth about 25 RBA basis points. In other words, were the RBA to be considering raising the cash rate in, say, September, by 25 basis points, it won’t have to because fiscal tightening has already affected such an increase. Thus the much anticipated first rate rise looks more likely to be next year rather than this year, as many have been suggesting for a while anyway.

After leaping on Monday night on the implications of Friday’s low Chinese CPI, base metals fell back last night on the triple whammy of weaker than expected Chinese data, weaker than expected US retail sales, and an ongoing decline in European investor sentiment. Nickel fell (yes, fell) 1.4% while copper lost 0.6% and the others were mostly weak. Spot iron ore was unchanged at US$103.00/t which, with all the scaremongering going on around that market lately, is probably a positive result.

Nymex traders are expecting a fall in weekly US crude inventories in the numbers tonight, as the US summer driving season draws nearer, but no one ever gets it right. OPEC’s monthly report released last night showed no change to demand growth expectations, despite apparent slowing in the likes of China. Brent is thus up US92c to US$109.32/bbl and West Texas is up US$1.27 to US$101.86/bbl.

The SPI Overnight rose 1 point.

Commonwealth Bank ((CBA)) will provide a quarterly update today to bring the bank earnings season to a close while CSR ((CSR)) will post its full-year result.

The ASX 200 will start with a handicap today as all of Westpac ((WBC)), National Bank ((NAB)) and Macquarie Group ((MQG)) go ex-div.

Rudi will appear on Sky Business at 5.30pm.
 

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