The Overnight Report: Greenback Correction

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By Greg Peel

The Dow closed down 11 points while the S&P lost 0.2% to 2104 as the Nasdaq fell 0.3%.

Big Figure Shy

As has been noted in this Report over the years, there is nothing different about an index level ending in “000” compared to any other number. “Big figures”, as they are known, are merely psychological levels, and only to the extent an investor might say “I will sell if it gets to 6000”. Rarely will you hear someone say “I will sell if it gets to 6132.98”, for example, unless they are a technical tragic.

Thus it would seem the ASX200 is currently shying away from the big figure level of 6000. We recall that the index had a hard time breaching the 5000 level, which represented the Lehman break-down point in 2008, finally managing in 2013. Last year was all about pushing through a wall at 5500, and a lot of work was required. Now we have 6000 to contend with.

And we are contending with that level at a time when value amongst traditional yield stocks, and popular dividend growth stocks, is difficult to find. The implication from last week’s Fed statement that we may not necessarily see the first Fed rate hike in 2015 has underpinned the value of such stocks, but yield compression (share prices rising to reduce yield for new buyers) is forcing investors to focus more squarely on earnings potential, and not just on dividends per share.

Recent weakness in Australian business and consumer sentiment highlights perception of an uncertain economy being guided by a rudderless government, with a frustrated central bank trying to counter both global money printing and domestic fiscal flip-flopping. Earnings growth for Australian ASX200 companies is becoming more difficult as further cost cutting opportunities diminish. The day may yet be saved, and 6000 breached, were we to see a rebound in commodity prices, significantly iron ore and oil.

We saw a bit of that yesterday, and indeed the materials and energy sectors were the only two sectors to finish in the green. Red elsewhere was more about a lack of enthusiasm for pushing any higher. But it would be a brave forecaster who would suggest the oil and iron ore price slides have ended.

Currency Capers

When the ECB began its QE program early this month, the euro collapsed. Yet this was no surprise announcement – the commencement of QE had been well flagged, bar a few details. By the time the euro was down 25% in 2015 alone, many began to call it “oversold”, at least in the nearer term. And sure enough, since the Fed hinted its rate hike may be a while off yet, a mad short-covering rally has ensued. This down-and-up of the euro is best reflected in the up-and-down of the US dollar index.

EURUSD volatility has exacerbated the greenback’s surge and pullback, which on a standalone basis against any other currency has been due to the turnaround in Fed policy perception. The bad news for Australia is that this currency volatility has sparked another short-covering rally, this time in the Aussie. The Aussie is this morning up another 1.4% over 24 hours to US$0.7882.

It would be ultimate frustration if commodity prices did actually bounce but the Aussie killed the party.

Fedspeak

Janet Yellen had her say at last week’s press conference, and as has become typical in recent years under the Fed’s more open approach to guidance, the other Fed presidents like to follow-up with their own thoughts as well. Guidance? Should be called “confusion”. Last night we had the St Louis Fed president suggesting the dovish Fed statement may have given investors the wrong impression, such that another “tantrum” (a la the “taper tantrum’ in 2013) may ensue when the first hike is announced.

The Fed vice chairman then followed that up with a suggestion the first rate rise is warranted this year, despite the statement hinting perhaps not, but that it would not necessarily trigger a series of steady follow-up hikes (as was the case in the Greenspan years).

Sometimes I long for the days when information was not so immediate, and overwhelming. We could carry on life, and investment, without having to go over and over and over the same old ground every month/day/hour.

Resource Rebound

The US dollar index is down another 0.9% to 96.97, and aside from dollar weakness being reflected in Aussie strength, we’re also seeing ongoing short-covering in commodities on the mathematical adjustment of the dollar denominator.

Last night only aluminium stood still as the rally continued across the LME base metal spectrum. Nickel was up a percent, zinc 1.5%, copper 1.8% and lead and tin around 3% each.

Gold is up another US$7.50 to US$1190.90/oz.

The oils similarly continued higher, with West Texas rolling into the May delivery front month. It’s up US74c to US$47.31/bbl and Brent is up US66c to US$55.77/bbl.

Alas, the denominator effect does not impact as predictably on the iron ore price. Iron ore is down US80c to a new six-year low of US$54.20/t. The situation is becoming dire for many a junior miner balancing debt and/or high operational cost issues. It is believed Fortescue Metals ((FMG)) may now be looking to address its debt issue, having failed to secure convertible bond financing at a decent price, by selling off some of the farm.

Today

Wall Street had a flatter session, for once, last night, bungling along on a small positive for most of the day until some heavy selling came in right at the death. The SPI Overnight closed down 2 points.

With data now front and centre, Wall Street will tonight have February inflation numbers to consider, along with a flash estimate of the March manufacturing PMI.

Locally, HSBC’s similar estimate will be watched closely, while Japan and the eurozone will also be in on the flashing.

Kathmandu ((KMD)) and TPG Telecom ((TPM)) will release earnings results today.
 

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