The Overnight Report: Cold War Heating Up

This story features HARVEY NORMAN HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: HVN

By Greg Peel

The Dow closed down 42 points or 0.3% while the S&P lost 0.2% to 1996 and the Nasdaq dropped 0.2%.

The Aussie dollar spiked up yesterday on the release of the local June quarter capex and capex intentions data. Net capex rose by 1.1% in the quarter to bring the year on year rate to minus 4%. The good news is that non-mining capex rose 5.1% in the June half.

More important to economists such as those at the CBA, however, is capex intentions – indications from industry as to how much they intend to invest ahead. CBA estimates, on the back of this data, that mining capex will fall 20% in FY15 and non-mining capex will rise 5%, providing a net capex reduction of 10%. That may not look too promising for economic growth, but in fact it’s not as bad as the RBA has feared. Says CBA:

“The capex data confirms that the transition from mining to non-mining led growth is more advanced than current RBA forecasts imply.”

This news was not enough to enliven the local stock market nonetheless. Outside of individual earnings reports and growing fear in the iron ore space, the market generally backed off from recent highs as the spectre of geopolitics again emerged. Russian troops have advanced into the Ukraine.

This was confirmed by NATO last night and consensus suggests Putin is not going to back away from anything less than a full scale invasion of Ukraine. Not in 1960s tanks-rolling-through-Prague style, rather in sinister sneaking style. In his own mind, Putin never left the KGB and continues to pine for everything that was great about the Soviet Union, supported by 80% domestic popularity. Don’t these people remember The Wall?

The EU is meeting this weekend and Angela Merkel has already flagged a step-up in sanctions against Russia, even though she knows they would have an internecine impact with regard her own country’s economy. Having bounced back from the brink this past week, aided by soothing words from the ECB, last night the German DAX fell 1.1%.

Once again Europe had its now familiar impact on Wall Street. The Dow fell over 100 points from the bell, bounced around, and only managed a more sustained recovery once European markets closed at 11.30am NY. The broad market S&P500 saw an even more pronounced pattern, falling 10 points from the 2000 high to be down only 3 points by the close.

The turnaround can largely be attributed to last night’s GDP revision, although the “buy at 11.30” trade has become popular among the jobbers on Wall Street. The US June quarter GDP result was revised up to 4.2% growth from the first estimate of 4.0%, when economists had predicted a slip to 3.9%. July pending home sales rose 3.3%, to their highest level in eleven months.

Wall Street has nevertheless become wary of weekends, preferring to square up on Friday in case the world blows up before Monday. And it’s the Labor Day long weekend in the US, meaning no markets this Monday.

The “safe haven” markets are even more wary, and last night the German ten-year yield fell another 4 basis points to 0.88%. The US equivalent fell 3 basis points to 2.33%. Gold rose US$6.00 to US$1289.00/oz with the US dollar index steady at 82.48.

The Aussie is up 0.2% at US$0.9356, having traded higher yesterday after the capex release. The Aussie can also be considered a “safe haven” by association, via the interest rate differential.

There is more pain to come today for the iron ore miners, with the iron ore price falling another US90c to US$87.30/t. At this rate the price will soon be testing decade lows.

Those who’ve become more excited about copper of late will also be feeling frustrated today, with the red metal once more falling below the US$7000/t mark on the LME last night, down 1.3%. Only aluminium held steady as geopolitical uncertainty resurfaced.

Nymex traders used said uncertainty to push West Texas crude up US83c to US$94.58/bbl, but if Russian sanctions are going to impact on global energy markets, it won’t be US domestic supply that will suffer. Yet Brent fell US11c to US$102.52/bbl.

The SPI Overnight fell 5 points.

The materials sector will likely dominate local trade today, and geopolitical escalation will remind traders that it’s Friday. Everyone is now exhausted as the earnings season comes to a close.

It’s not quite over yet though, and today’s last hurrah includes reports from Harvey Norman ((HVN)), Transfield Services ((TSE)), Virgin Australia ((VAH)) and Woolworths ((WOW)).

On the economic front, private sector credit is out today locally, while Japan will provide a monthly data dump. A flash estimate of eurozone CPI, or lack thereof, is due tonight, and the US will see personal income and spending and consumer sentiment numbers.

Wall Street will be vacated by lunchtime nonetheless, to play planes, trains and automobiles. A handful of skeletons will see it out to the closing bell.

No Wall Street on Monday night.
 

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