The Overnight Report: Minutes Of Sleep

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By Greg Peel

The Dow closed down 2 points while the S&P lost 0.2% to 2048 as the Nasdaq fell 0.6%.

Big overnight falls in commodity prices were evident in yesterday’s market action on Bridge Street, as might be expected. The US$3 fall in the iron ore price to new multi-year lows proved again a wake-up call for anyone thinking iron ore juniors are looking cheap, with the littlies all hammered yesterday. Base metal price falls also contributed to a materials sector drop of 1.2%. Energy chimed in with a similar fall on lower oil prices.

Strap yourself in again. Last night iron ore fell another US$2.10 to US$70.00/t. Here comes the six handle.

The biggest percentage mover on the day was nevertheless consumer discretionary, as the supermarkets took another hit. Aside from growing concern over the infiltration of the likes of Aldi and Costco as we head into the festive season, Woolies has a new headache in the form of faulty electrical cable sold through Masters to some 40,000 businesses and households. The fresh food people copped another rotten 2.2% punishment, and one wonders just how long Lowes might hang on before deciding to cut its Masters losses. (That’s the US hardware partner, not the local discount clothes shop for footballers.)

Notably, the only two sectors to post gains on the day were utilities and healthcare, underscoring a growing shift into defensive mode. Santa rally this year? Nowhere to rally from (yet).

The Bank of Japan held a policy meeting yesterday and as expected made no changes, having just increased QE to Y80trn per month. "Japan's economy continues to recover moderately as a trend, although some weaknesses remain mainly in output," read the BoJ statement, with reference to Monday’s shock GDP contraction. There’s nevertheless trouble brewing in Tokyo where Mr Kuroda and Mr Abe, once considered joined at the hip, are now at odds over Abe’s political decision to scrap the next sales tax hike. The deal was: You address Japan’s government debt problem and I’ll print money. Now one side has reneged.

Never mix politics and monetary policy. Can you imagine if an Australia government had the power to cut interest rates heading into an election?

In the US, the selling that appeared late in Tuesday night’s session continued from the open last night, despite the release of positive housing data. While October housing starts were down it was all about the lumpy apartment component. Take that out and a 4.2% rise in single family home starts was the best result in a year, and the annual pace of starts is running at an encouraging 7.8%. Building permits, the precursor to starts, rose 4.8% in October to mark the biggest jump since June 2008.

But last night was all about waiting for the release of the Fed minutes. Given the last Fed statement caught the market out with its shift to unexpected hawkishness, traders likely squared up on the expectation more detail may send Wall Street south again. In actual fact the indices popped on the release, although as per usual it was likely because someone (or a computer) reacted too quickly before taking the time to actually read the minutes.

The bottom line within those minutes is that the FOMC is intent on raising rates next year even if US inflation expectations remain low and the global economy remains weak. Fed critics are accusing the committee of taking an academic approach to policy, based on historical data comparisons, and ignoring what the market is telling the central bank through its measurement of risk (bond rates remain stubbornly low despite expectations of a rate rise mid next year).

The initial pop quickly turned to selling and it appeared as if Wall Street might finally post some actual movement, this time to the downside, but then the buyers arrived late in the day. Once again Wall Street meandered its way through the session in an almost disinterested fashion and closed decidedly undecided, with the Dow down two whole points at the close.

The US dollar is up only 0.2% to 87.73 but does anyone remember when the Aussie was a “commodity currency” rather than a carry trade currency? No? Well over the past 24 hours the Aussie has been sold steadily lower, falling over a cent in total to US$0.8613.

As noted, iron ore is down another couple of dollars so one might expect Aussie weakness to persist, although last night base metal prices managed to stabilise. All metals posted slight rises except for nickel, which shot up 3%. “Technical buying” was cited as the reason. My old chem teacher “Hydro” Hawkins never told me nickel was the most volatile element on the periodic table.

Gold nevertheless fell US$11.80 to US$1182.00/oz last night on the stronger greenback and further confirmation, via the minutes, that a Fed rate rise seems almost locked in. The US bond market also responded with a 3 basis point rise in the ten-year to 2.35%, but once again we are reminded that that yield hit 3% at the beginning of this year just on taper confirmation, let alone any talk of a rate rise.

The SPI Overnight closed down 8 points, having called yesterday rather badly.

Lock up your daughters, the flashers will be out and about over the next 24 hours. China (HSBC), Japan, the eurozone and US will all release flash estimates of November manufacturing PMIs. US releases also include the CPI, existing home sales, leading economic indicators and the Philly Fed manufacturing index.

OMG, there are an awful lot of AGMs to be held locally today. BHP Billiton ((BHP)) will be the biggie, and Wesfarmers ((WES)) will draw attention, but otherwise there’ll be quite a tea and bikkie shortage in the country by day’s end.

Rudi will appear on Sky Business at noon.
 

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