The Overnight Report: Later This Year

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By Greg Peel

The Dow closed up 92 points or 0.5% while the S&P gained 0.3% to 2115 and the Nasdaq added 0.1%.

Local Vertigo?

The ASX200 was up, down and all around yesterday in a choppy session, suggesting a little bit of indecision might be creeping in in the rarefied air of post-GFC highs. The 5900 mark looks like a possible stumbling block at present. Yesterday we were down 24 points, before rallying, falling back, and then rallying again to be up 19. Sector moves were mixed.

It may be possible the market was being cautious ahead of last night’s testimony from Janet Yellen, but as we head into the last few days of the local result season there are some interesting statistics to note.

The FNArena Result Season Monitor has now assessed reports from 184 stocks and there are around 100 to go in the final burst. Having begun the season with a clear “beat” majority, the ratio of beats to misses has now levelled off to around 1.5, or 69% to 47%. This is relatively standard stuff, given companies tend to understate rather than overstate their guidance ahead of results. Misses are typically more severely punished than beats are rewarded.

But the notable statistic relates to the response from stock analysts. To date the season has elicited only 26 ratings upgrades to a whopping 84 downgrades. The vast bulk of those downgrades are a response to perceived overvaluation. Note that a single stock can suffer multiple downgrades.

Who’s right? The market or the analysts?

Mind you, a lot of those downgrades, particularly those to Hold from Buy rather than Sell from Hold, come with the caveat that the analyst appreciates the global search for yield will limit downside for the stock. Which makes for an interesting discussion when we consider whether the RBA will cut again, and whether the Fed is set to raise.

Central Bank Semantics

Last night Fed chair Janet Yellen told the Senate Banking Committee that the timing of the central bank’s first rate rise remained data-dependent. The Fed wants to be confident inflation can move back towards the 2% target and as yet, there remains slack in the US labour market.

However much of the discussion centres around the word “patient”. Having previously, for years, suggested interest rates would stay lower for longer, the Fed last year hinted at the first rate rise now being in view but insisted that the FOMC would be patient in making that decision. As the day gets closer, the FOMC will drop the word “patient”. The market has been assuming that as soon as “patient” is discharged, the rate will be raised by 25 basis points at the subsequent meeting.

Last night Yellen confirmed the word “patient” will soon be dropped from the Fed statement. But she warned that this did not automatically mean a rate rise at the next meeting. The central bank wants the flexibility to make that decision on a meeting by meeting basis, she said.

The markets took this as a “dovish” sign, such that the rate rise should be expected later in the year rather than earlier in the year. That is why US stock markets rallied, and why the US ten-year bond yield fell 7 basis points to 1.99%. But other commentators scoffed, suggesting that in reality the Fed has not changed its tune one iota. There could still be a rate rise between March and June, they believe.

Presumably there are many out there who wish they would just do it so we can stop having to endlessly speculate, but no doubt as soon as the first hike is in the bag, we’ll start another tiresome discussion about when the next one might be.

Playing the Rates

If the RBA cuts, which it could do as early as next week, local yield stocks become more attractive. But how much is priced in? More likely if the RBA doesn’t cut, yield stocks will take a hit.

If the Fed raises, yield stocks, including Australia’s, become less attractive to US investors. They remain, of course, attractive to investors all over the rest of the world where rate cuts and QE are the current trend.

Greek Relief

After all the drama and fears of what might have been, Greece’s creditors last night accepted the government’s reform proposals and in so doing rubber stamped four more months of bail-out funds. The Tsipras government pledged to take a disciplined approach to budgets, spending and tax collection, while remaining committed to relieving the “humanitarian crisis” brought about by years of economic hardship and high unemployment.

Sounds wonderful to me, some might say utopian. Just how Tsipras intends to pull this off is another matter. But a certain Mario Draghi would be relieved, not so much because he was worried about a Grexit but because he has quietly been hinting to the EU that their austerity drive is acting against the ECB’s attempts to revive the European economy, and that perhaps a little leeway might be a good idea.

It might even be possible that the Angela Merkels of this world have begun see beyond Teutonic stoicism and realise that Draghi, and even Tsipras, have a point.

Metals Awaken

The combination of Greek relief and supposed Fed dovishness had the US dollar index down 0.1% to 94.46 last night, but the same combination awoke LME traders from their Chinese New Year funk. The Chinese are back from today, but last night copper jumped 1.8% to lead solid gains across the base metal spectrum.

Without the Chinese, iron ore remains unchanged at US$64.30/t. Gold also remains little changed at US$1201.00/oz.

And it was a rare night in the oil markets – prices hardly moved. West Texas is down a few cents to US$49.15/bbl and Brent is down a few cents to US$58.74/bbl.

The Aussie dollar currently seems to be rushing back and forth between 77.5 and 78.5 without really going anywhere, and last night was an up night, by 0.5% to US$0.7834.

Today

The SPI Overnight closed up 24 points or 0.5%.

Harking back to the RBA rate discussion, today sees the first of the December quarter data releases in the lead up next week’s GDP which, incidentally, is released the day after the RBA meeting. Today sees construction work done and the wage price index.

With China back on board, HSBC will release its flash estimate of the February manufacturing PMI today.

It’s another very crowded day on the local reporting calendar but note also that Telstra ((TLS)) goes ex today, providing an apparent drag on the index.

Rudi will make his usual appearance on Sky Business, Market Moves, 5.30-6pm today and later, between 8-9pm, he will host Your Money, Your Call.
 

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