The Overnight Report: And Today We Go Down, Again

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This story features WOOLWORTHS GROUP LIMITED.
For more info SHARE ANALYSIS: WOW
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow fell 334 points or 2.0% while the S&P fell 2.1% to 1928 and the Nasdaq lost 1.8%.

Bridge Street bounced hard yesterday, led by the banks and big miners but otherwise featuring a full team effort from all sectors. The ASX200 made it back toward the tipping point of 5300. It’s all a bit academic given Wall Street tossed a coin and it came up tails last night. So today we sell again.

For the record, the ABS tea lady’s dart hit 6.1%, which was duly announced as Australia’s official unemployment rate for September. It was actually a second attempt – unfortunately the mailroom boy wandered in just at the wrong time on the first throw, and we do send his family our condolences. The market saw the number and shrugged at its meaninglessness. The ABS has but not one shred of credibility.

European markets followed Wednesday night’s lead from Wall Street from their opening bells last night. Wednesday night’s Fed minutes had suggested to markets that the Fed would remain dovish for some time yet, being, as it was, concerned with slowing global growth and the rising greenback. The fact the FOMC had elected to leave the expression “considerable time” in the statement killed off any notion of an early rate rise.

But that implication became clouded last night. Indeed, central bankers have thrown the whole world into confusion. Last night ECB president Mario Draghi spoke to Fed vice chair Stanley Fischer in a public interview in Washington.

To date Draghi has ensured the ECB will do “whatever it takes” to provide monetary support to the eurozone economy. But at the same time he has insisted that a recovery requires support on the fiscal side of the equation, fuelling the fire of debate over whether austerity is the wrong approach in Europe. He believes some of the eurozone members should be spending more, not less.

The room broke into nervous laughter when in the Q&A, Draghi said “For governments that have fiscal space, then of course it makes sense to use it. You decide to which country this sentence applies”. It was a clear swipe at the Bundesbank and German government who are committed to a balanced budget in Germany.

I suggested earlier this week that European markets might be losing faith in Mario Draghi’s capacity to save the eurozone economy. Last night he largely hinted he couldn’t, without the support of structural reform. The European stock markets turned tail from their early rallies and plunged back from whence they’d come.

At that same Q&A, the Fed vice chair was asked how he would define the FOMC’s “considerable time” framework for the first rate rise. We recall that Fed chair Janet Yellen once said “six months, that sort of thing,” and then rapidly back-pedalled. Last night Fischer said “anywhere between two months and a year”.

If two months is a “considerable time,” life must be pretty slow for ol’ Mr Fischer.

And just to add to the confusion, the St Louis Fed president said last night the recent strong US jobs data validate his view that the Fed needs to start raising rates soon and suggested markets are “making a mistake” in their estimation of when the first rate hike will be made.

So from Wednesday night to last night, global markets shifted from believing the ECB would do whatever it has to and the Fed will not raise rates while the global economy was sinking, to worrying that the ECB may not be able to go it alone and the Fed could still raise rates sooner rather than later.

That’s why the Dow’s down 300 points. That, and the fact many had been arguing US stocks had become overvalued, and that it’s October – the feared month of wailing and gnashing of teeth.

So the US dollar index is back up 0.4% to 85.55 and just when we were worried the Aussie was going to continue rebounding, it’s down 0.7% to US$0.8762. Gold held its ground and rose a further US$5.10 to US$1224.30/oz in all the confusion while the US ten-year bond yield remained steady at 2.33%.

A lot of attention is being paid to oil prices, which continue to slide. Brent fell US$2.06 last night to US$89.53/bbl and West Texas fell US$2.39 to US$85.27/bbl. Brent is now down 20% from its last high on fears of slowing global growth. Interestingly, WTI prices are starting to reach a level which will make the higher cost producers of US shale oil uncommercial, suggesting the shale glut may now have to be kerbed. Next month OPEC will meet and, it is assumed, cut production quotas. All points to oil prices finding a level soon, and in the meantime the much lower cost at the pump should boost the US consumer economy.

Central bank confusion has spilled over into metal markets but with the Chinese back, volumes have picked up and volatility has subsided. Despite oil’s call on the global economy, base metal prices are already depressed which suggests further downside should be limited. Last night saw a positive session in which copper rose 0.8% and nickel rose 1%.

Iron ore fell US30c to US$79.50/t.

The SPI Overnight closed down 58 points or 1.1%.

Suddenly Australia’s housing finance and investment lending data have taken on a new level of importance, given the RBA and regulatory bodies seem set to introduce investment mortgage restrictions. The August data are out today.

Woolworths ((WOW)) will post its quarterly sales numbers today.

There’ll be a few very whiplashed traders around the bars of the Sydney CBD tonight.
 

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