Daily Market Reports | Jun 20 2014
By Greg Peel
The Dow closed up 14 points or 0.1% while the S&P gained 0.1% to 1959 and the Nasdaq lost 0.1%.
Down by the stairs and up by the elevator. That was the story yesterday as the ASX 200 posted its biggest single gain for 2014, up 1.5%. So much for the 5400 level on futures and index option expiry day – it was nothing but up as the 5450 mark was also surpassed.
It’s amazing what a one dollar rally can do for iron ore producers. The materials sector led the charge with a whopping 2.7% gain. Energy had been knocked down on Wednesday following Shell’s sale of its Woodside stake but on a big jump in oil prices on Wednesday night, the energy sector chimed in with a 1.8% gain. Industrials posted 1.9%, and never to be left out, the banks rose 1.5% amidst the sea of green.
Adding to the euphoria was a comment from the Chinese Premier with regard to a possible hard landing for the Chinese economy. “This will not happen,” said Li, adding that he expects China’s GDP to grow by 7.5% — which is a lot more optimistic than most analysts are suggesting. Beijing would nevertheless not be adopting “strong stimulus” to assure such growth, rather measures that are “smart and targeted”.
Janet Yellen’s earlier press conference and assurance that “no mechanical triggers” would set off the first Fed rate rise clearly helped the local market yesterday, along with her assertion that recent gains in US inflation were just “noise” and that the Fed did not see the stock market as overvalued. It was not a day to be short.
As I have noted a number of times before, the “smart money” prefers to stay on the sidelines during the volatility that can immediately follow a Fed statement/press conference, mull things over overnight and then make a move the next day. Last night it appears the conclusion was that despite the Fed’s comfort, the stock market is pretty well valued and not worth pushing beyond all-time highs at this point. So what does one buy instead? Bonds are too expensive also. Oil has surged on the Iraq factor. The only thing that hasn’t yet moved is gold.
Until last night. Investors were apparently not so thrilled with Yellen’s “noise” comment, which suggests potentially that the central bank may be overly complacent about inflationary factors building in the US economy. As a precaution, it might be time to grab a bit more gold for the portfolio. Then last night President Obama announced that if deemed appropriate, the US was prepared to take “targeted and precise” military action against ISIL. From the opening bell on Comex, the mother of all short-covering rallies commenced, sending gold up US$42.80 or 3.4% to US$1320.30/oz. Silver jumped 4.3%.
Oil was not left out of the equation either, and despite the obvious connection between Iraq and oil prices, these days many investors prefer oil to gold as an inflation hedge. Brent crude rose US81c to US$115.06/bbl and West Texas rose US85c to US$106.64/bbl.
Meanwhile, forex traders were still hanging on Yellen’s inference that US interest rates would remain low even if unemployment fell further and inflation exceeded the 2% target. The implication is that the UK will indeed likely be the first major economy to see a rate rise, hence last night the pound traded at its highest level against the greenback since 2008. The US dollar index fell 0.1% to 80.32. The Aussie, on the other hand, is unchanged over 24 hours at US$0.9402, despite yesterday’s stock market spree.
US bonds aren’t biting, with the ten-year yield steady at 2.62%.
The LME had its first chance to respond to the Fed last night, and on the promise of lower-for-longer US rates and Chinese stimulus, all metals bar nickel posted modest gains.
The good news for those ploughing into iron ore names yesterday is that the spot price is up again overnight, by US40c to US$90.70/t.
The new September front-month contract in the SPI was down 4 points overnight.
Just how much was yesterday’s volume and movement on Bridge Street related to expiry? That’s what we’ll find out today, one presumes (although I think we know where gold stocks might be headed). But with a week to go to EOFY, fund managers will be happy to see stock prices higher rather than lower for end of year reporting. In between are the tax sellers, and somewhere in the background, the real world.
Wall Street sees its own June expiry session tonight, the famed “quadruple witching”. Anything can happen.
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