The Overnight Report: Fun And Games All Round

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By Greg Peel

The Dow fell 142 points or 0.8% while the S&P lost 1.2% to 2089 as the Nasdaq fell 1.6%.

Whiplash

When did Bridge Street become Wall Street? When did the day of an RBA policy statement become as wild as the day of a Fed statement? Yesterday, that’s when. Let’s check the tape:

At 10.20am, the ASX200 was up 74 points. At 1.00pm, it was up 6 points. At 2.31pm, it was up 61 points. At 3.10pm, it was down 24 points. At 4pm, it closed down one point, giving the impression of a quiet session.

Yesterday was a gamed played in two halves: before the rate cut and after the rate cut. When ANZ Bank ((ANZ)) provided a more positive earnings report before the bell yesterday than Westpac ((WBC)) had the day before, fears were allayed of bank-wide weakness, which had led the sector down on Monday. So investors piled back into the banks, and the index surge from the open.

Hang on, said the market. An RBA rate cut is already baked in and we’re up another 1%? What if they don’t cut? It was not, yesterday morning, beyond the realm of possibilities. So down we came, before positioning at only a modest gain before the 2.30pm RBA announcement. When the rate cut was announced, the high frequency computers went berserk, programmed to buy on the “good” news of a rate cut. But suddenly they felt very alone.

Here’s why…

That’ll Do Ya

In its April statement, the RBA board said:

“In Australia the available information suggests that growth is continuing at a below-trend pace, with overall domestic demand growth quite weak as business capital expenditure falls. As a result, the unemployment rate has gradually moved higher over the past year.”

In yesterday’s statement, it said:

“In Australia, the available information suggests improved trends in household demand over the past six months and stronger growth in employment.”

April:

“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 continue to assess the case for such action at forthcoming meetings.”

May:

“At today's meeting, the Board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand.”

In one month the Australian economic outlook has gone from “below-trend” to “improving”. And the board has shifted from “continue to assess the case” to, well, by omission, not continuing to assess the case. Only because inflation is low did the RBA decide the economy could handle another cut. And there was no suggestion of a further cut. We’ve had two this year, in February and May. In 2013 the RBA cut twice, before sitting back for 16 months to gauge the impact.

The Aussie dollar similarly spiked down initially, on the rate itself, and then went flying up once someone took a closer look at the statement. The money markets had not just baked in a May rate cut, they were assuming an even chance of a second cut this year. The Aussie is up 1.4% to US$0.7942 over 24 hours, aided by 0.3% drop last night in the US dollar index to 95.12.

Grexit Back On

Just when it looked like both Greece and its lenders were intent on finding a middle ground, last night it all fell apart again.

No deal will be possible until the European Commission and the IMF reduce the number of red lines they’re demanding, said a Greek government official, in references to the lenders’ insistence on extensive reforms. And what has been frustrating Greece even further is that the EC and IMF are now demanding different “red lines” in contradiction to one another.

The ECB governing council meets tomorrow night, and must decide whether to again extend emergency funding to Greek banks because the impasse is dragging on further. Given the risk of handing over such money, the ECB came under criticism for doing so the first time around. But while Greece may survive its payment schedule in May, beyond that it appears the country will simply be broke.

So now what? If we were on QI, this is when we’d be holding up our “Nobody Knows” cards.

The news from Athens sent the German stock market spiralling down 2.5% last night, and the French market down 2.1%. Eurozone bond yields, which had risen notably as late as Monday night, all fell back again.

Meanwhile, Wall Street was opening.

Trade Blow-Out

Aside from the news from Europe, Wall Street was hit with some alarming US data last night.

The March trade balance showed a 43% surge in deficit, the biggest single month jump on record. It was all about a big jump in imports with no balancing jump in exports. It is also, nevertheless, explained away by the fact US West Coast ports were shut down due to industrial action early in the year, meaning imported goods were stuck on docks. The dispute was settled in March and suddenly all the goods flowed out, and were recorded.

So it should not be an issue, but for the fact it means that when the US March quarter GDP is revised to include the month of March, what was a mere 0.2% growth result in the first estimate will swing into the negative.

So between Greece and a contractionary US economy, and the fact every time the Dow gets over 18,000 it has to go back below it again, it was a weak session on Wall Street. Of particular note was another panic exit of high-PE biotech names, sending the Nasdaq plunging 1.6%.

The US dollar also fell, as noted, and so did US bond rates. The ten-year yield is up another 4 basis points to 2.18%.

More Stimulus Please

As the European stock and bond markets tumbled on Greek fears, no one much noticed that the European Commission last night raised its 2015 economic growth forecast for the eurozone to 1.5% from a previous 1.3%. Commodity markets noticed, however.

And on the LME, which had been closed on Monday night given the holiday in the UK, the focus of attention was the weak Chinese PMI data delivered on Friday and Monday. With Chinese manufacturing falling into contraction, the expectation is for more stimulus measures to be implemented by Beijing.

That was enough to send base metals surging once more last night. While tin only managed half a percent, and copper one percent, lead and zinc jumped 2%, aluminium 3% and nickel over 3.5%.

Spot iron ore rose US$1.30 to US$59.10/t.

The oils were also stronger, but playing a part was news protests at Libyan ports were preventing oil exports from leaving. West Texas jumped US$1.65 to close above 60 for the first time in five months, at US$60.68, while Brent rose US$1.03 to US$67.49/bbl.

And yes, gold is gravitating back towards 1200 again, with a US$5.20 gain last night to US$1193.00/oz.

Today

Greece is an issue and Wall Street was down, but one might suggest the bulk of the 49 point or 0.8% fall in the SPI Overnight by the close this morning is to do with all the attention given, since yesterday afternoon, to assumptions the RBA has now ended its easing cycle.

Retail sales numbers are out in Australia today, along with new home sales data. HSBC will release its take on China’s service sector PMI.

In the US, the ADP private sector jobs report will provide the usual curtain raiser for Friday’s non-farm payrolls.

On the local stock front, it's Commonwealth Bank’s ((CBA)) turn today to send bank investors into a frenzy, one way or the other, when it provides a quarterly update. Woolworths ((WOW)) will hold a strategy day, and presumably reveal March quarter sales data, while all eyes will be on the BHP Billiton ((BHP)) extraordinary meeting, in which shareholders will vote on the South32 demerger.

Rudi will appear on Sky Business, Market Moves, 5.30-6pm today.

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