The Overnight Report: Rate Rise Ennui

This story features SANTOS LIMITED. For more info SHARE ANALYSIS: STO

By Greg Peel

The Dow closed down 6 points while the S&P lost one point to 2104 and the Nasdaq fell 3 points.

RBA Doubt

Well it’s official – Australia is now in the “good news is bad news” camp along with just about everyone else relying on their central bank to drive markets. The ASX200 surged from the open yesterday to be up 62 points, just ahead of the release of the March job numbers. Then back it came.

The numbers confounded all and sundry, including the RBA, who have been warning Australia’s unemployment rate will increase to at least the 6.5% level. This looked like a laydown misere call in January when the rate hit 6.4%, before backing off to 6.3% in February. Economists had expected another 6.3% read for March, but instead it came in at 6.1%. And February was revised down to 6.2%.

Often when the unemployment rate falls in defiance of expectation it can be explained by a drop in the number of people seeking work, but in March the participation rate actually rose. Either Australia’s economy is not in the dire straits many have been railing about, or once again we need to question the efficacy of the ABS statistical model.

Who knows? Whatever the case, the Aussie has shot up a whopping 1.6% over 24 hours to US$0.7803, to be back at the top of its recent trading range. Implicit in the move is a sudden shift in expectation from a “baked in” May rate cut to questioning whether there is another rate cut in sight at all.

Despite the implications, the consumer discretionary sector still managed to post a 1.3% gain yesterday. But the real market drivers of an ultimate 39 point gain were the resources sectors, with energy up 1.5% on the strong oil price and materials up 1.3% in sympathy.

Cut ‘Em Loose

Despite all the posturing, Greece made an eleventh hour payment of its most recent debt obligation to the IMF this month. But it took about all that was left in the bank, so Greece has asked for a delay on having to make next month’s payment. The IMF has responded with a flat out “No”.

The assumption is thus that the IMF-EU-EC troika has decided to let Greece go. While many a country has defaulted on its bonds in the past (Argentina, Russia for example), no one has ever defaulted on the IMF. While an actual default does not happen overnight, and in fact can take quite a while to work through, it seems a Grexit from the eurozone is now the probable outcome.

As to the ramifications, expectations range from calamitous to very little at all. But last night the German DAX index fell 1.9%, suggesting there’s at least a level of nervousness. The German ten-year bond yield is now sitting at 0.089%.

Release the Doves

The Fed is apparently spooked by the relative weakness of the US economy in the March quarter, which is due in part to a strong US dollar, weak oil prices and snow. No less than four Fedheads were out making comments last night, and the conclusion seems to be that the FOMC was all set to go in June but now is having its doubts.

Unusually, Wall Street did not respond to the more dovish rhetoric. In earlier days, any indication the Fed might move later rather than sooner would have sent the stock market soaring. But just as the Fed taper of late 2013 turned out to be a fizzer in market volatility terms by the time it was finally announced, Wall Street has already concluded the rate rise will probably not be in June. Hence, the news was met with a shrug.

Last night again saw mixed US data. The Philly Fed activity index rose to 7.5 this month from 5.0 in March when economists had forecast 6.0. But March housing starts fell short of expectations.

Earnings are the greater focus at present. Last night Citigroup beat on earnings but missed on revenue, yet its shares rose 1.5%. Goldman Sachs (Dow) beat on both counts yet its shares lost 0.4%. Netflix blew the world away with its result and saw an 18% share price surge.

Tin Canned

Fed dovishness has sent the US dollar index down 0.7% to 97.66 while the US ten-year bond yield closed down 2 basis points to 1.88%.

The fall in the dollar helped to drive price increases across the base metals, with copper and lead up 2% and nickel and zinc up 1%. LME traders remain buoyed by expectations of further Chinese stimulus. But ongoing uncertainty with regard Indonesian export bans has sent tin into a spiral, falling 6% last night and at one stage hitting 2009 lows.

Iron ore clawed back US30c to US$50.00/t. The materials sector has been strong on Bridge Street this week on the assumption a supply-side response is underway, if not from the biggies at least from the embattled juniors (eg Atlas). As to whether iron ore can follow oil and break meaningfully back through 50 is another matter.

The oils continued their recovery last night, with West Texas rising US56c to US$56.57/bbl and Brent rising US42c to US$63.74/bbl on the rollover to the new June delivery front month.

Despite the weaker greenback, gold fell back slightly to US$1198.00/oz.

Today

The SPI Overnight closed down 7 points.

Inflation will be a talking point tonight as both the eurozone and US release their March CPIs.

On the local stock front, Santos ((STO)) will release its quarterly production report today.
 

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