The Overnight Report: Iron Willed

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By Greg Peel

The Dow closed down 42 points or 0.2% while the S&P lost 0.4% to 2108 as the Nasdaq slipped 0.6%.

Material Gains

Iron ore remains the big story on the Australian stock market as the materials sector again led the index higher yesterday with a 1.7% rise. The iron ore price has risen again overnight to make eight consecutive up-days and prompt a lot of excitement in the beaten down miners, juniors in particular. But is it worth a 45% rally for Fortescue Metals ((FMG)) over the period? It just goes to show what short-covering can do.

The earlier oil recovery appears to have stalled somewhat but that hasn’t stopped the energy sector being caught in the iron ore updraft. As to why the banks, consumer sectors and utilities were all being sold down last week but bought right back up again since Friday is anyone’s guess, other than commodity contagion. There have been no particular changes on the RBA rate cut speculation front.

Glenn Stevens will make a speech in Sydney today which will be closely watched.

Deckchairs?

Bloody colonials. The Greek government has reshuffled its bail-out negotiation team, sidelining the upstart Aussie with a more conservative Pom. Australian-born finance minister Yanis Varoufakis has been considered by Greece’s creditors as part of the problem and not of the solution, ranting and lecturing his way to a forced stalemate and a lot of frustrated EU types. The prime minister has thus taken Varoufakis off the face-to-face team, replacing him with the UK-born economics professor and minister of international financial relations, Euclid Tsakalotos.

More tea?

The Greek issue was a concern for the Australian market as recently as last Thursday but when iron ore started to run, it became irrelevant. It will remain irrelevant the longer no progress is made but things might be different if Greece runs out of money and its creditors roll down the shutters.

Biotech Blues

While social media has played its part, a good deal of the rally in the Nasdaq over the past year to all-time highs has been about biotechs, driven to a large degree by industry consolidation. Last night Wall Street heard news that a closely watched three-way merger battle in the sector had stalled, and investors decided it best to take some money out. That trickle became a bit of a flood.

The 0.6% fall in the Nasdaq belies a much sharper fall in the biotech sector given the Nasdaq was held up by the elephant in the index, Apple. Apple shares rallied 1.8% last night into the company’s aftermarket result release and are up another 1.3% on an earnings beat.

The biotech sell-off spooked the broader market as the day progressed, after having been off to a flyer on the open. The Dow was up 95 points from the bell, led by the materials sector. Given the US consumes most of its own natural resources we don’t think of it as a commodity economy, but as last night’s 4.8% rally for diversified miner/driller Freeport-McMoRan attests, there’s plenty of iron ore, coal and metals being dug up over there as well.

Having hit new all-time highs in the S&P500 and Nasdaq on Friday, Wall Street decided last night might offer a good opportunity to square up ahead of Wednesday night’s Fed statement release and GDP result.

Shining Metals

As noted, iron ore is up again, this time by US$1.70 to US$58.70/t.

The US dollar index drifted lower again last night, down 0.1% to 96.74. LME traders cited the reshuffling of Greece’s negotiating team, which sparked a rally in the euro, as enough reason to buy base metals enthusiastically for another session. Copper, lead and nickel are all up another 1 to 1.5% while zinc rose 2.4% and tin 2.8%.

It seems at present as if the iron ore rebound is floating all commodity boats, no doubt turbocharged by short-covering but likely reflecting expectations Beijing will be pulling out the big guns to arrest China’s economic slowdown. Aside from monetary policy such as interest rate and RRR cuts, Beijing can up the ante on the fiscal side through increased spending on infrastructure and housing, which is good for raw materials.

Meanwhile the oils, which turned around ahead of metals and minerals, appear to now be consolidating after a period of wild volatility. The clue was in Friday night’s drop in the West Texas price despite another announced fall in US rig count. Last night West Texas fell US52c to US$56.53/bbl and Brent fell US63c to US$64.83/bbl.

Yesterday I suggested perhaps the gold bugs had tired of waiting for a rally above 1200 and had taken their bat and ball. Not so, apparently. Last night gold jumped US$21.20 to US$1201.60/oz and as to why, I really don’t know.

The Aussie is up another 0.4% to US$0.7852.

Today

The SPI Overnight closed up 7 points.

Glenn Stevens will be speaking by the time you read this and you’ll be able to hear a pin drop in the country’s dealing rooms.

The UK will release its first estimate of March quarter GDP tonight and consumer confidence numbers will be watched in the US.

On the local stock front, the quarterly reports keep rolling in as the AGM season warms up.
 

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