The Overnight Report: Now The Blue Chips Fight Back

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By Greg Peel

The Dow rose 158 points or 1.0% while the S&P gained 0.8% to 1888 and the Nasdaq added 0.9%. The Russell 2000 fell early in the session but eventually turned tail for a 0.5% gain.

Bridge Street posted another resilient performance yesterday, led again by the one telco stock that matters, along with ongoing strength in consumer staples and a rebound in energy. The banks slipped early but recovered ground, leaving further weakness in materials to balance the books. The ASX 200 closed flat after an initial drop on Wall Street weakness and the lower iron ore price.

Westpac’s consumer confidence survey was always going to be a Barry, and in this case was one Mr Crocker himself would have been proud of. The survey was conducted before the actual budget night but caught the lead-up of frenzied media speculation and dire predictions. Confidence fell 6.8% to a three-year low of 92.9, with numbers under 100 indicating pessimism.

The two big movers in the survey’s sub-indices were “family finances compared to a year ago”, which fell 11%, and “family finances over the next year”, which plunged 23%. It will be interesting to see whether the June survey – the first post-budget and encompassing the assumption of Senate rejection – provides a floor or displays further weakness.

Meanwhile, family finances are very much linked to wages, and wage growth in Australia is at its lowest level at least since records began in 1997. The March quarter saw growth of 0.7% as expected, leaving annual growth unchanged at 2.6%. Last March quarter that figure was 3.1%, in 2012 growth averaged 3.5%, and the ten-year average is 3.8%.

Anaemic wage growth provides little comfort for domestic consumption, which is one of the elements required to improve if the Australian economy is to balance out diminishing mining investment. It does, however, ensure the RBA will be in no hurry to raise rates given the lack of inflation implicit in the result. Presumably the decline in wage growth reflects the end of the mining construction boom, in which even night soil carters in the Pilbara were commanding $150k. In today’s more decentralised wage system, note the CBA economists, Australian wage-earners have been forced to become “price takers” rather than “price makers”.

At least the Australian data are simple enough to explain. Over in the US, no one knows what the hell’s going on and last night didn’t help solve any puzzles. After Tuesday night’s sharp fall, there was much debate about whether the US stock market was about to pay heed to the US bond market which, arguably, is signalling recession ahead. So what did they do last night? Bought it with their ears pinned back.

The Dow posted its best session in five weeks in rising 1%, and in so doing posted a rare outperformance among the indices. Every time Wall Street dips, investors buy the blue chips. There were no economic data releases to spark the rebound, only the release of the minutes of the last Fed meeting. But the bulk of the gain was posted well before their release.

Early session rebounds for both the Nasdaq and Russell were immediately met with selling once more, at least until it became apparent the Dow and S&P weren’t following suit this time. Then the buyers came in.

One interesting fact: The net market cap of the top five companies in the S&P 500 is equivalent to the entire market cap of the Russell 2000 small cap index.

The minutes of the Fed meeting held no surprises. The board discussed “several approaches” to the first phase of tightening (rate hike) but decided it needed to be flexible, and also noted persistent low inflation meant the Fed could let unemployment fall much lower before there was a need to act. Bernanke’s target had once been 6.5%, now passed. “Flexibility” is a soothing word for Wall Street, as it implies the Fed will not act if it believes the economy, or markets, can’t handle it yet.

Janet Yellen made a speech last night, but it was to a bunch of new NYU grads and not the forum for market-taunting rhetoric.

Blow me down if the US dollar index wasn’t steady last night at 80.06, as was gold at US$1294.20/oz. The US ten-year bond yield did rise some more, up 3bps to 2.54%. Will 2.5% prove the floor? The Aussie is a little higher at US$0.9252.

Base metals were mostly a little weaker again, with copper falling 0.5% and nickel having another pullback session of 2.5%. But stop the presses, iron ore has rallied.

Iron ore is up US$1.00 to US$98.50/t. One swallow does not a summer make, as Linda Lovelace would say, but combined with the strong session on Wall Street we might just see some actual improvement on Bridge Street today.

The SPI Overnight suggests 23 points, or 0.4%.

It’s flash day today, implying estimates of May manufacturing PMIs are due from China (HSBC), Japan, the eurozone and US.

James Hardie ((JHX)) will release its full-year profit result.

One interesting point to note is that last night’s rally on Wall Street coincided with the VIX volatility index falling below 12. The last time it was this low was in 2007.

Rudi will appear on Sky Business at noon.
 

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