The Overnight Report: Pre-Empting The Fed

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By Greg Peel

The Dow rose 187 points or 1.1% while the S&P gained 1.2% to 1985 and the Nasdaq added 1.8%.

Unsurprisingly, Bridge Street followed Wall Street in taking an overdue breather yesterday as sector-specific movements took over from the overall recovery trend of recent sessions. Materials and energy stocks were thumped on lower iron ore and oil prices while banks were mildly positive and CSL ((CSL)) drove healthcare higher on its announced flu vaccine-related acquisition. Come up with an Ebola vaccine and you could name your own price.

There was good news for Japan, where retail sales marked a third consecutive month of gains with a 2.3% surge in September against 0.6% expectations. It’s good news for the government as it appears the spectre of the sales tax increase may now be behind it, providing scope to achieve the targeted 2% inflation level. The sales tax is used to fund welfare payments for Japan’s ageing population and given the scale of this issue, the government intends to introduce another sales tax increase next year.

With one day to go before tonight’s Fed statement release, Wall Street began steadily and it looked like it might be another flat session of squaring up. The morning’s economic data releases were also rather mixed.

New durable goods orders, excluding aircraft and defence orders, fell 1.7% in September, the biggest fall since January. Economists had expected a 0.6% gain. The Case-Shiller 20-city house price index rose by 5.1% on an annual, seasonally adjusted basis in August, down from July’s 5.6% and representing the eighth consecutive month of slowing price increases.

On the other hand, consumer confidence has risen in October to 94.5, from last month’s 89.0, to mark the highest reading since October 2007 (when Wall Street peaked pre-GFC). Economists had expected a fall to 87.0. And the Richmond Fed manufacturing index hit 20 this month, up from 14 in September and shattering expectations of a fall to 11.

Corporate news was also mixed. Twitter had reported an earnings result miss after the previous closing bell and its shares fell 10%. But Alibaba announced it was interested in plugging into Apple’s new payment system so Apple shares rose 1.6%, pushing the stock to a new all-time high. Facebook posted an earnings beat after the bell but its shares are down 1.8% in the after-market.

So there appeared every reason just to ride out the session and wait until 2pm NY tonight when the Fed is expected to announce QE3 will end this month as planned, but is also expected to convey a more dovish tone in its language and thus push out expectations of the first rate rise. But it doesn’t work like that. For reasons the New York Fed has tried to ascertain without success through extensive research, Wall Street typically rallies ahead of a Fed statement. No one really knows why, given over the years there must have been plenty of negative as well as positive statements from the market’s perspective. And so it was that the indices began to creep up, and then accelerate, and then run riot.

The Dow may have regained 17,000 and the S&P may have jumped 1.2%, but the Nasdaq, led by Apple, surged 1.8% and the Russell small cap index – the one that evoked a lot of consternation on the way down before rebounding sharply – rallied an extraordinary 2.9%. Small caps have relatively more to gain from ongoing “free money” than large caps do.

And it looks like the “carry trade” may be back on after this brief interlude. When the Fed suddenly turned more dovish earlier this month, all but dismissing suggestions of an early rate hike, I made the point of “surely that which set of the Sell Australia trade thus no longer applies”. Well here we are, 300 ASX200 points higher, and over the past 24 hours the Aussie has steadily climbed 0.7% to US$88.61. The US dollar index is only down 0.2% to 85.39.

Gold is steady at US$1227.80/oz and the US ten-year bond yield is up 3 basis points to 2.28%.

It appears that the US$80/bbl mark for West Texas Intermediate crude has become the line in the sand, at which the supposed bargain hunters move in. Twice now that price has been briefly breached intraday before a rebound. It happened on Monday night so last night West Texas rose US48c to US$81.25/bbl and Brent rose US48c to US$85.96/bbl.

Nickel took off for a screaming rally last night after having hit its lowest level in March. A few buyers set off a short-covering rally that became a mad scramble, and nickel closed up 6%. News of a strike in Peru sent copper up 0.9% and indeed all metals, bar zinc, enjoyed a rally.

Which unfortunately can’t be said for iron ore. It fell another US80c to US$78.80/t and is back to only US$1.20 above the five-year low marked last month.

Never mind, the SPI Overnight is up 29 points or 0.5%.

So we now await tonight’s Fed statement. In the meantime, today marks the busiest day on the local AGM calendar with a few quarterly production reports from the miners thrown in.

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

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