The Overnight Report: Greenback Growls

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By Greg Peel

The Dow closed up 13 points while the S&P lost a point to 2127 and the Nasdaq fell 0.2%.

Don’t Panic

“Members agreed that, as at the time of the reduction in the cash rate in February, the statement communicating the decision would not contain any guidance on the future path of monetary policy. Members did not see this as limiting the Board's scope for any action that might be appropriate at future meetings.”

And with this statement in the minutes of the RBA’s May policy meeting we can finally put to bed the notion the central bank has ended its easing cycle. Most of the angst on the release of the May policy statement was based on the omission of the line “The Board will further assess the case for such action at forthcoming meetings”. This line appeared in April, and in March, but not, as the May minutes rightly point out, in February, when the RBA previously cut its rate.

Seems the market missed that one. And it makes sense – cut the rate, then wait to see what happens before signalling further action. Now we can all get some sleep.

Not that the minutes provided any great comfort on Bridge Street yesterday. We fell back in early May when the market thought perhaps the RBA had finished cutting, but we have not recovered on the knowledge that is not necessarily the case. Other factors are at work, and to some degree these are technical. On a failure to regain 5750, the ASX200 would be destined to return to 5600 or lower, so the tea leaves suggested.

Technical influence was evident yesterday when the SPI Overnight signalled a 22 point rally on open and the physical proceeded to fall 40 points. The fundamentalists pushed the index back to the flatline late in the morning but the selling pressure quickly returned. There were falls in energy and materials given lower commodity prices and, in the case of materials, the great Twiggy tanty. But the big losers on the day were the supermarkets (consumer staples), down 1.9%.

Consumer staples has proven the most volatile of all sectors in May, belying the sector’s natural state of being as a cash flow defensive.

The Aussie dollar dipped a little on the release of the RBA minutes yesterday but given both the RBA’s Statement on Monetary Policy and a speech delivered by the deputy governor had already put the kybosh on end-of-cycle fears, the reason the Aussie is down 0.9% to US$0.7916 over 24 hours is because the US dollar index is up another 1.2% to 95.30.

Mario Rushes In

The US dollar index is up because the euro is down. The pullback in the US dollar from its prior peak lends itself as much to signs of improvement in the eurozone economy as it does to assumptions the Fed will hold off for longer. The euro has been a little wobbly of late given all the talk over Greece being destitute, and on Friday night it started to tip over, sending the US dollar up a percent.

Last night it really crashed, posting its biggest session fall in two months, and sending the greenback up another percent. It was not about Greece this time however, it was about the ECB.

Mario Draghi is worried that in the northern summer, European treasury officials and bond market traders all go off to lie on some pebbles and bond markets become decidedly summer-thin. The ECB is implementing a massive bond purchase plan (QE) and were monthly purchases to be consistent, the risk is the central bank would steamroller through a lack of supply in the July-August period. So while there will be no alteration, at this stage, to the total size of the intended QE package, the ECB will step up its monthly bond purchases in May and June before the markets all go quiet.

That was enough to set the euro off. Granted, the eurozone April CPI, released last night, came in at a lower than expected 0.0% at the headline, the zone’s March trade balance missed expectations, and the ZEW investor sentiment survey for May came in weaker than forecast.

But what Draghi probably wasn’t thinking about at the time is the unintended flow-through consequences of his seemingly sensible announcement. Euro down, US dollar up, and dollar-denominated commodities taken to the cleaners.

Commodity Crunch

Thanks Mario, they said on the LME, as aluminium and lead fell 1%, copper and zinc 2% and nickel a whopping 5.5%.

Iron ore posted its sixth consecutive decline with a fall of US60c to US$58.40/t.

West Texas crude fell US$2.34 or 3.9% to US$57.26/bbl. Brent fell US$1.90 or 2.9% to US$64.37/bbl.

Gold fell US$17.70 to US$1208.00/oz. Silver, which has been on a tear of late, fell 3.5%.

Wall Street Angst

Admittedly the US dollar was also supported last night by news US housing starts leapt 20.2% in April to mark the highest pace of construction since 2007. While clearly the result represented a rebound out of the snowbound March quarter, it still blew away forecasts.

But is this good news or bad, vis a vis Fed policy? No one’s quite sure anymore. The Dow initially rose around 50 points but could not hold on, dragged down, as it was, by the energy sector in particular on lower commodity prices.

Normally we’d look to the US bond market to provide a clearer signal of market perception, unlike that madhouse of a stock market, but unfortunately the US bond market has become its own madhouse of late. The US ten-year yield jumped 9 basis points to 2.24%, which is actually what it should do if it fears a Fed rate rise, but such persistent volatility is rarely seen in a market which is something like six times the size of the US stock market.

As it was, the Dow closed just over the line of another all-time high, but new ATHs have ceased to become cork-popping accomplishments in 2015. There is a lot of concern valuations are stretched ahead of said Fed rate rise, and that we still haven’t seen that 10% correction everyone said was long overdue two years ago.

Today

Unlike the Australian market, which is now down 6.3% from its April (post-GFC) high, and counting. The SPI Overnight closed up 2 points but this seems ambitious given the extent of commodity price falls overnight, the general sogginess that seems to have set in at the moment, and the fact the tea leaf readers called a move to 5500 if 5750 was not breached.

Westpac will release its monthly consumer confidence survey today – the first assessment post rate cut and post budget.

Japan will release its March quarter GDP result.

The minutes of the Fed meeting will be released tonight and as usual, will be pored over. However that meeting was back in April, so the value of those minutes is somewhat diminished.

On the local stock front, APN News & Media ((APN)), Boral ((BLD)), Graincorp ((GNC)) and Wesfarmers ((WES)) will all hold investor/strategy days today while Iluka Resources ((ILU)) is among those companies holding AGMs.
 

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