The Overnight Report: But On The Other Hand…

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By Greg Peel

The Dow closed up 100 points or 0.6% while the S&P gained 0.8% to 1999 and the Nasdaq rebounded 0.8%.

Yesterday’s trade on Bridge Street followed the same theme of the past several sessions – sell Australia. It might all change today, but we have to be cognisant that when the Fed does eventually signal a rate rise is nigh, this is what we are to expect.

The banks, the telco and the big healthcare names were all off again yesterday in a market which saw only one sector manage to scrape to an unchanged close, being materials. A 3.8% bounce in the iron ore price and the best this sector can do is close flat?

The evidence is clear in that BHP and Rio saw gains of around 0.3% while the likes of Atlas Iron and BC Iron saw 3-5% gains. Those holding “Australia”, and exiting, do not own junior miners but they do own BHP and Rio. When you strip away the veil of interest rate differentials and Australia’s attractive yield plays what we are left with is structurally lower commodity prices, reflecting China’s attempts to migrate to a consumer-led economy and away from an export and construction-led economy, and a non-mining economy struggling to re-establish itself.

All of which makes last night’s developments rather interesting.

The “Sell Australia” trade was not sparked by lower commodity prices or by weak Chinese industrial production numbers but by the rumour the Fed was going to remove the “considerable time” phrase in its policy statement which has been acting as guidance towards the first rate rise. Well last night a Wall Street Journal article hit the wires debunking that rumour, suggesting there will be no significant change in language nor evidence of a major policy shift when the statement is published tonight.

Around the same time, news came through from China that Beijing had injected around US$80bn of liquidity into the country’s five biggest banks in order to reverse the apparent slowing in China’s economic growth.

The Chinese news is “knock me down with a feather” stuff, and indeed there would only have been a surprise reaction if Beijing had said it would not be injecting liquidity. The market’s been expecting this since the weekend. The Fed speculation is the real news, and a big reversal of the last several sessions’ trade can be traced directly to 11.20am New York time, when the WSJ article hit the screens. Up until that point Wall Street and all other markets were flat, and then Bam!

Of course when the first rumour came out, not everyone was convinced, and now this contrary assumption is out, not everyone is prepared to count their chickens either. Once again, we’ll simply have to wait until tonight to find out. There was always a chance, given some fairly sharp movements in several assets these past few days (the Aussie being one obvious example), that some squaring up would have been on the cards last night. But the sharpness of some reversals has short-covering written all over it.

Let’s start with the Aussie. It’s up 0.7% to US$0.9089. The US dollar index is down 0.2% to 84.05.

The real impact was felt in commodity markets. Base metals had tanked out on Monday night so last night’s moves were mere reversals, but lead, nickel and tin were up 1% to 1.5% and aluminium, copper and zinc were up 2%. Brent crude was up US$1.17 to US$99.05/bbl for the new November delivery front month while West Texas, still in October, was up US$1.99 to US$94.80/bbl.

Gold typically sits there on day one wondering what the hell’s going on before moving the next day, but in this case the next day is Fed Day. Gold is up a mere US$1.90 to US$1235.40/oz.

The interesting one is the US ten-year bond yield. It had run from under 2.4% to over 2.6% as the whole Fed debate played out, before settling at 2.59% on Tuesday night. Last night, when all other markets were retracing their steps, the ten-year was a big fat “unch”.

The “smart money” that is the bond market tends not to play the headless chook volatility game. Presumably bond players have simply decided wait-and-see is the safest policy. By contrast their stock market hick cousins sent the Dow into new record high territory around 2pm before a little bit of a fade towards the close, but still a triple-digit gain.

The actual US economic data of the session centred on the PPI, which showed a 0.0% increase in August when a 0.1% gain was expected. The annual rate of wholesale inflation fell to 1.8% in August from 2.0% in July, which is not really that which might encourage a rate rise. But it’s all about that falling oil price, and the Fed excludes food & energy in its policy considerations. The core PPI rose 0.1% to also be up 1.8% annually, an increase on July’s 1.6%.

No real clinchers there. The CPI is out tonight.

Moving away from the US, those hoping Tuesday night’s move in the iron ore price signalled the beginning of a desperately needed rebound would be disappointed to know iron ore fell US70c last night to US$84.50/t.

The SPI futures have not been any sort of a useful indicator this past several sessions given the “Sell Australia” trade has been more of an exogenous rather than endogenous influence. But if those sellers decide to take a time-out today, the SPI Overnight’s close of up 27 points or 0.5% might even prove conservative.

Or it might provide the sellers with a better opportunity. This market is not very cut and dried at present. Note that when the Aussie falls, foreign investors are hit on the value of their positions ceteris paribus. Selling Australian assets puts downward pressure on the Aussie, encouraging more selling, which impacts the Aussie, and do-si-do your partner.

In case you weren’t aware, the Fed will deliver its policy statement tonight and Fed chair Janet Yellen will hold a press conference thereafter. US data releases tonight include the CPI and housing market sentiment.

News from the highlands is that the William Wallace supporters are on 52% in the latest poll but between the usual “undecided” cohort and statistical margin for polling error the Scottish vote is still too close to call. The bookies still have the loyalists as favourites.

Premier Investments ((PMV)) will report full-year earnings today.

Rudi will appear on Sky Business this evening at 5.30pm.
 

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