The Overnight Report: Politics And Pullbacks

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By Greg Peel

The Dow closed down 85 points or 0.5% while the S&P lost 0.5% to 2107 and the Nasdaq fell 0.6%.

Not a Surprise

Well don’t say I didn’t warn that a rate cut was not a given yesterday. The board said February or March last month, and decided on February. It didn’t seem like they were set to go two in a row.

However, another rate cut should not be far off, based on Glenn Stevens’ statement:

“At today’s meeting the Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will further assess the case for such action at forthcoming meetings.” (My emphasis)

Which is why the ASX200 did not fall out of bed yesterday, it simply eased, and bear in mind there were a few largish ex-divs in there as well. Utilities copped the biggest hit, of course, down 1.9%, while the banks and the telco also pulled back. There were also falls for the resource sectors but this has to do with commodity price falls as it is to do with the bounce in the Aussie dollar.

Even the Aussie’s bounce was muted. The 0.6% jump to US$0.7820 only recovered the ground lost in the previous 24 hours, and despite any potential disappointment over a lack of cut yesterday, we’re still very much stuck in the 77.5-78.5 range.

GDP Countdown

Despite all the fears of a China slowdown, and fairly worrying import numbers from China in recent months, Australia’s export volumes actually rose 1.0% in the December quarter, while imports fell 2.5%. We may have seen wallowing iron ore and coal prices, but by volume, metals exports (mostly iron ore) rose 11.5% in 2014 and coal exports rose 20.7%. Rural exports rose 9.0%.

By price, exports fell 11.1% over the year and imports fell 2.7%. The terms of trade is 10.7% lower over the year. All up, Australia’s current account deficit, which includes the terms of trade and the balance of interest payments/dividends into/out of Australia, fell 21% in the December quarter to $9.6bn.

Economists are expecting today’s December quarter GDP result to show 2.4% growth over 2014, below the 3.0% “trend”.

Nasdaq Retreats

Wall Street was disappointed last night when February vehicle sales came in below expectations. Mind you, at 5.3% net growth for the month, car manufacturers can hardly be upset. But forecasts were for 7.1%, and February’s heavy snow was blamed for the miss.

Vehicle sales are nonetheless not really the stuff to send the Dow down 85 points, or indeed down 150 points as it was at midday. Some commentators blame Benjamin Netanyahu. The Israeli prime minister made a speech to Congress last night and criticised the US for its attempts to broker a nuclear deal with Iran.

The previous Iranian president famously suggested he wanted to wipe Israel off the map, and I’m sure for Mr Netanyahu the feeling is mutual, but peace-loving populations would rather see a deal, and if nothing else the speech reminded Wall Street that there remains a constant geopolitical threat out there.

Yet realistically Wall Street probably pulled back last night because the Nasdaq hit 5000 the night before, with great fanfare and populist media headlines. Such milestones usually evoke some profit-taking. The 0.6% drop in the Nasdaq took it back to 4979.

There is also likely an element of square-up going on ahead of this week’s US jobs numbers, and let’s not forget Thursday night’s ECB meeting at which the specifics of eurozone QE are expected to be outlined.

Oil and Geopolitics

If Mr Netanyahu scared any market last night it was the oil market. It’s discomforting when Israel is critical of its one vital ally’s attempts to arrive at a compromise with Iran. Meanwhile, violence has again erupted in Libya, putting that country’s production, yet again, under threat.

West Texas rose US64c to US$50.35/bbl and Brent rose US$1.35 to US$61.02/bbl.

Soggy Metals

Any relief felt from last weekend’s Chinese rate cut has proven short-lived on the LME. The Chinese have not barrelled in and bought post-holiday, so prices have begun once more to slip. Last night copper, nickel and zinc all fell over 1% and aluminium fell 0.5%.

Spot iron ore fell another US50c to US$62.30/t.

With the US dollar index flat at 95.40, gold is off slightly to US$1202.90/oz.

Today

The SPI Overnight is down 13 points or 0.2%.

Australia’s GDP numbers will be out this morning and it's service sector PMI day across the globe, including HSBC’s take on China’s number.

Tonight in the US sees the ADP private sector jobs number as a precursor to Friday’s non-farm payrolls release.

Rio Tinto ((RIO)) is among a number of stocks going ex today.

Rudi will appear on Sky Business' Market Moves today, 5.30-6.00pm.

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