The Overnight Report: Happy Birthday Mister President

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By Greg Peel

Wall Street was closed last night for the Presidents’ Day holiday.

Local Bounce

Despite signs of near term overvaluation, the Australian market seems in no mood to go down, recovering yesterday from a late morning dip. It is of little surprise the ASX200 was trimmed by 36 points before lunchtime given Friday’s 130 point surge, but the buyers just weren’t having it.

Energy (+0.9%) and materials (+0.5%) again led the charge while utilities (-0.9%) took a hit for the yield stocks for a close of up 11 points.

Japan Disappoints

After two consecutive quarters of economic contraction, Japan’s GDP grew by an annual rate of 2.2% in the December quarter to drag the country out of recession. This seems like a good result, except that economists were forecasting 3.6%.

The big “miss” underscores the conundrum facing Shinzo Abe, being how to tackle Japan’s mountainous debt while still providing economic stimulus. It’s the sort of stuff that keeps Joe Hockey awake at night. The Bank of Japan is pumping trillions of yen into the Japanese economy yet the fiscal drag from last year’s sales tax hike – the measure imposed to allow for debt reduction – still lingers as the hike’s anniversary approaches. Abe had planned for another hike this April but last year scrapped that idea.

Still, the big drop in the yen over 2014 has served to boost Japanese exports, particularly to the world’s largest consumer economy, the US. But aside from being caught between a fiscal rock and a monetary hard place, Japan also has to deal with the global “race to the bottom” of monetary policy in which “beggar they neighbour” tactics cancel out the benefits of currency devaluation.

It is for this reason the RBA has been forced to cut, and will probably have to cut again.

Beware of Greeks

On February 28, Greece’s E240bn bail-out program will end. The bail-out program to date has come with the imposition of strict austerity measures as a cost. Greece is near broke and needs to extend the bail-out but the new government wants to lift the austerity measures which are preventing any possibility of a Greek economic recovery. Three words come to mind here: eat, cake and too.

The EU finance ministers gathered in Brussels last night for meetings intended to thrash out a solution. Were the EU to refuse to provide concessions and cut Greece loose, the risk is the collapse of Greece’s banks and financial reverberations throughout Europe and the global market, perhaps even contagion that spreads to other struggling eurozone economies.

Were the EU to bow to Greece and water down its austerity requirements while still handing out the euros, the rest of southern Europe would be queuing up for their own concessions and more governments would likely fall to anti-austerity parties, right up to France.

Good luck ministers.

Oh and how’s the ceasefire coming along?

Quiet Markets

With Wall Street closed and China winding down it was quiet across financial markets last night.

The oils, for once, were as good as unchanged. West Texas is trading electronically at US$52.70/bbl and Brent, which only trades electronically, is at US$61.58/bbl.

Base metals all moved less than 1% on the LME, in either direction, with copper up 0.6%.

But hold the phone. With only one more session of trade before the Chinese bundy off, iron ore is up US$1.80 to US$65.10/t.

The US dollar index is up 0.3% to 94.37 on yen weakness while gold is relatively steady at US$1230.80/oz. The Aussie is also steady at US$0.7772.

Today

The SPI Overnight closed up 11 points or 0.2%.

The minutes of this month’s RBA meeting are due out today. They will explain why the central bank chose to cut its cash rate when six months ago many an economist was convinced we’d be going up by now. And the market will be looking closely for clues as to whether the RBA might go it again next month.

The influential ZEW investor sentiment index is out in Europe tonight while Wall Street will be back to assess housing market sentiment and the Empire State manufacturing index.

The US earnings season is winding down but the local season is winding up. Today’s raft of reports include those from Amcor ((AMC)), Coca-Cola Amatil ((CCL)) and Fortescue Metals ((FMG)) while ANZ Bank ((ANZ)) and Macquarie Group ((MQG)) will provide trading updates. Commonwealth Bank ((CBA)) goes ex today so don’t panic when a big share price drop seems apparent.
 

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