The Overnight Report: Trying To Stabilise

This story features WHITEHAVEN COAL LIMITED. For more info SHARE ANALYSIS: WHC

By Greg Peel

The Dow rose 225 points or 1.3% while the S&P gained 1.0% to 2021 and the Nasdaq recovered 1.0%.

Yesterday morning the SPI Overnight closed down 68 points and yesterday afternoon the ASX200 closed up 16 points, having fallen only 32 points on the open. On Wednesday night the Dow fell 195 points on the Fed statement and last night it rallied 225 points. It is not a case of there being some very misguided traders out there. It is simply a case of a global market trying to figure out just what is really happening now, and what might happen next, without a lot of certainty.

Yesterday the Australian ten-year bond rate fell to 2.48% — below the RBA overnight cash rate of 2.5%. Yesterday morning the Aussie traded up a cent to over 80 before giving that all back by the afternoon, and last night the Aussie plunged one and a half cents to US$0.7765. On Wednesday we decided the RBA would not cut its cash rate within the next couple of months given a stronger than expected core inflation read, but it looks like money and forex markets are now begging to differ.

The turnaround in the local stock market yesterday was all about yield, again. We thought we’d put the yield-at-any-cost trade behind us as we entered 2015, looking to start shifting into cyclical stocks on the promise of a US rate rise and an improving global economy. The energy sector was hit again yesterday (-1.6%) on falling oil, so it was left to utilities (+0.8%) and the banks (+0.6%) to drag the index higher.

This would tend to imply the market is assuming Wednesday night’s Fed statement suggested a longer wait for the rate rise, although US commentary since then is leaning towards the Fed being more upbeat, hence June is still expected. US bond rates seem to tell a different story, but then the relativities between US Treasury yield and, for example, the German bund yield (0.3%) ensure US yields must remain low irrespective of Fed policy. The same is true for the Aussie bond rate. And if the Aussie bond rate has to come down, to balance out global interest rate relativities, so too must the Aussie dollar.

A weaker Aussie makes Australian yield stocks even more attractive to US investors, as long as the exchange rate stabilises at a new level. Right now there’s a risk in buying Australia if the currency is still in a slide. Local investors have decided, as they did for a lot of last year, that Wall Street shenanigans are not sufficiently relevant to local investment if local investment is more about simply maintaining a reasonable return rather than aspiring to significant capital gains. The S&P500 and ASX200 have thus appeared disconnected this week. The Dow, to use the best known indicator, fell nearly 500 points in two days and the local index rose around 20 points.

So why the Wall Street rebound last night? Overnight commentary suggests this was due to a rebound in the oil price – West Texas initially traded into the 43s before sharply rebounding to close up US18c at US$44.60/bbl – but then WTI has been moving around in the mid-40s for a while now so it’s hardly the stuff of 200-point Dow rallies. Brent closed up US60c to US$49.15/bbl. I can point to what I note after every Fed statement release – that the “smart money” doesn’t play the headless chook game in the last couple of hours of trade on Fed-day but rather applies more careful consideration overnight and then responds the following day.

Why did the Dow drop 200 points on the statement? Probably because a “solid” economy, previously “moderate”, and “transitory” low inflation mean the Fed remains on track to raise rates, when Wall Street had assumed the ECB’s move would delay such a rise. But then what of “consideration of international developments”? The argument still rages as to exactly what this implies. Perhaps the Fed will indeed hold off. Or perhaps 500 points in two sessions just seemed overdone whether there’s going to be a rate rise this year or not.

Perhaps the Fed has no idea either. This is actually a popular assumption.

Gold has thrown in the towel, nonetheless. It looks like the Fed remains on track and hence the US dollar should continue to rise (dollar index up another 0.3% last night to 94.78), thus even massive ECB money printing is not going to underpin gold. It fell US$27.30 to US$1257.30/oz last night.

The US ten-year yield clawed back 3 basis points to 1.75%.

Last night was the LME’s first chance to respond to the Fed statement and all metals closed weaker, although not markedly. The strong dollar can probably be blamed. Copper fell 0.6%.

Iron ore continues to drift lower, falling another US40c last night to US$62.30/t. We’re now only a couple of weeks away from the Chinese New Year week-long holiday so anything can happen in the lead-up to, and emergence from, that disruption.

Yesterday the SPI Overnight closed down 68 points and this morning it has closed up 50 points, or 0.9%. On the strength of yesterday’s predictive performance one might assume the ASX200 will be down today, but it’s a funny old market at present. We’ll probably see some buying in energy, but given we didn’t follow Wall Street down should we now follow it up?

It’s rather difficult to call at present.

December private sector credit data are due locally today while Japan will offer up a raft of monthly numbers, including inflation. A flash estimate of the eurozone’s January CPI is due tonight but has waned in relevance post-ECB. China will report its PMIs on Sunday, but before then the US will see a first estimate of December quarter GDP tonight. Given current volatility, that could really put the cat among the pigeons once more.

On the local stock front, the last handful of resource sector quarterly reports is due today. Whitehaven Coal ((WHC)) will report interim earnings.
 

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