The Overnight Report: Geopolitical Flux

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

By Greg Peel

The Dow closed up 16 points or 0.1% while the S&P gained 0.3% to 1936 and the Nasdaq added 0.6%.

By Greg Peel

Bridge Street posted no more than a cautious rebound yesterday despite one of the best sessions this year on Wall Street on Friday night, matching Friday’s 1.3% fall with a 0.4% gain. At the micro level, the only sector not to close in the green yesterday was consumer discretionary after the market learned JB Hi-Fi ((JBH)) is actually mortal. That stock fell 8% following a weak result release and probably would have fallen a lot more were JBH not the fourth most shorted stock in the market at around 12% (See FNArena’s The Short Report on the website).

At the macro level, the supposed end to Russia’s military exercises on the Ukraine border – the news which drove Wall Street on Friday night – did not seem to enjoy as much currency downunder. Admittedly, US air strikes in Iraq dominated the headlines, as well they might given the Abbott government has signalled it is ready to rejoin a coalition of the willing.

The news from Iraq is the ousting of the prime minister by his own government, to be replaced by the current finance minister assuming he can form a government within 30 days. The move has the support of the Iraqi president. Maliki was seen as part of the problem and not of the solution when it comes to the Sunni insurgency, being inequitably pro-Shia. The new man is seen as more impartial and able to bring the various warring groups together.

But Maliki is refusing to go, so the issue is not yet resolved. Meanwhile, President Putin may have called an end to military exercises on the Ukraine border but he has not withdrawn hardware or troops, which now number 48,000. Instead he plans to send a “humanitarian” convoy into eastern Ukraine to provide aid to the starving inhabitants. Given the West immediately pictured a very big Trojan horse rolling into Donetsk, that convoy will now be led by the Red Cross in cooperation with both Russia and the EU.

What is Putin really up to? The suggestion is not even he knows. He’s just making it up as he goes along. And as to what ousted prime minister Maliki will do next is uncertain, as he has loyalist troops and police forces now blockading Baghdad.

Given ISIL has failed to advance as far as the southern Iraqi oil fields, markets are less concerned about Iraq than they are about the ramifications of developments in Ukraine. This conflict puts a struggling European economy at risk, and the flow-on could be devastating at this fragile stage of the global economic recovery. Meanwhile, President Putin has laughed in the face of sanctions, announcing last night that Exxon has just sunk its first well in Russian Arctic Circle territory. Methinks the head of Exxon might just have been the recipient of a rather incendiary phone call from one President Obama.

Oil prices were mixed last night, with Brent falling US24c to US$104.52/bbl and West Texas rising US34c to US$97.88/bbl.

On the US domestic front, fears of an impending Fed rate rise were further eased last night when the Fed vice chairman, Stanley Fischer, made a speech in Sweden. In his speech Fischer supported the views of former Treasury Secretary Larry Summers who has suggested the US economy may be stuck in a “new secular stagnation” in the post-GFC era, trapped in a savings glut which is ensuring weak demand, met by weakness in the supply-side of labour, capex and productivity.

The IMF has suggested Summers may be on the money, while Fischer expressed his disappointment in the global recovery. The assumption from Wall Street is that interest rates will indeed stay lower for longer.

With this in mind the Dow was up 74 points by late morning and it looked as if Friday’s relief rally may have further to run. But the indices wavered as the afternoon wore on, with just too much uncertainty creating a pall. European markets nevertheless finished on a strong note, around the time Wall Street peaked out, with the German DAX up 1.9% to 9180, pulling away from the 9000 cliff edge, the French CAC up 1.2% and even the London FTSE, which has not proven as volatile recently, up 1.0%.

Despite Fischer’s comments the US ten-year bond yield did not fall any further last night, rather it is steady at 2.42%. The US dollar index is up a tad to 81.46, and gold is a tad lower at US$1307.90/oz. The Aussie is 0.1% lower at US$0.9263.

Base metals were mixed in London on small moves. Iron ore fell US40c to US$95.30/t.

The SPI Overnight closed up 22 points or 0.4%.

One wonders how investor sentiment is faring in Europe at present. The ZEW survey is out tonight. Beforehand we’ll see the NAB business confidence survey locally along with June quarter house prices.

A handful of stocks will report today to provide some economic indicators. Among them we’ll see just how bad things are in mining services via Bradken ((BKN)), how the REITs have been travelling via GPT ((GPT)) and whether or not Domino’s Pizza ((DMP)) still reigns supreme.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms