The Overnight Report: Holiday Over

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By Greg Peel

The Dow closed down 190 points or 1.0% while the S&P fell 1.0% to 2104 and the Nasdaq dropped 1.1%.

More of the Same

Suggestions among brokers that the big banks are value at these levels had that sector running up another 1.2% on the local market yesterday in another green-across-the-screen session that saw all sectors close higher. The revival in utilities (+2.5%) stepped up a gear while talk of Chinese interest in a certain junior iron ore miner helped materials (+0.8%), as did another rise in the iron ore price, and consumer discretionary (+1.1%) decided to have a run.

Importantly the ASX200 closed above the critical 5750 level, at 5773, which technical analysts consider to be the current pivot point. If the market can hold above 5750 for two or three sessions then another run at 6000 would be expected, but if it fails to hold then chances are a new low could be seen below the 5775-odd we pulled back to in the May sell-off.

According to the analysts.

With Wall Street returning from its long weekend feeling spooked, the risk is we will drop below 5750 today.

Sell-Off

Wall Street returned to trigger the biggest sell-off in stocks in a month last night after a period of very low volatility. Indeed the VIX volatility index on the S&P500 jumped 16% last night and was up 20% at one point.

It has not been uncommon this year to see Wall Street mark new all-time highs and then hesitate, and the longer that hesitation the more likely a pullback has been. Those pullbacks have so far not been too dramatic or long-lasting, and indeed the Dow managed to settle back above 18000 and the S&P above 2100.

That Greece is broke is not new news on Wall Street but default fears continue to gain traction as the Greek saga continues to grind on. The latest development is that the IMF may allow Greece to spread the lumpy payment due next week over a couple of smaller payments, but this is not a step towards Greece being granted any more bail-out funds. What was new news on Wall Street last night was the ominous swing to the left recorded in Spain’s regional elections held over the weekend, suggesting financial contagion may no longer be the main threat, political contagion may be.

European worries were enough to set Wall Street off last night but the clincher was remarks made by Fed vice chairman Stanley Fischer. Fischer suggested markets should stop agonising over exactly when the first Fed rate rise will come and concentrate more on what the pace of monetary tightening will be once the first move is made. It will not be a mad dash as it was the case over 2004-06, when then Fed chair Alan Greenspan hiked rates 25 basis points in eleven consecutive months.

The pace will be slow, Fischer insisted, such that he could see the cash rate rising from zero to 3.25-4.00% over a period of three to four years.

The vice chair’s comments follow on from last week’s suggestion by chair Janet Yellen that the first rate rise will likely be this year but, as Fischer echoed, a cautious approach will be taken thereafter. Wall Street has taken these comments as implying the Fed is trying to prepare markets for that first rate rise now in order to avoid excessive volatility at the time, and if that’s the case then it would seem the Fed is itching to get that rate rise on the board. First rate rise? Forgeddaboudit, the Fed is saying. The pace of tightening will be so slow the first move won’t mean much at all.

So of course, Wall Street panicked and sold heavily, which is exactly what the Fed is trying to avoid. But a couple of hundred Dow points is nothing compared to the potential 10% pullback some have been predicting from the day the Fed signals its move.

Another reason Wall Street panicked is because rate rise timing is data-dependent, and suddenly US data have swung from soggy to much brighter.

Data Deluge  

US new durable goods orders fell 0.5% in April, but as per usual there were lumpy aircraft and auto order swings involved. Remove those, and non-transport orders rose 0.5%, marking the second increase following five straight months of declines.

New home sales rose a better than expected 6.8% in April, while the Case-Shiller 20-city house price index showed a better than expected 1% rise in March to be up 5% year on year. The FHFA price index of houses under Fannie/Freddie mortgages disappointed with a 0.3% slip in March, but matched Case-Shiller on 5% year on year growth.

The Conference Board’s monthly index rose to a better than expected 95.4 for May, up from 94.3 in April. And the Richmond Fed activity index snuck back into expansion with a rise to plus 1 from minus 3 in April.

These positive data releases suggest expectations of another economic rebound out of a snowbound first quarter look to be founded, as was the case last year. But they also mean a data-dependent Fed will have its finger hovering over that red button.

Which makes an 8 basis point drop in the US ten-year bond yield to 2.14% look strange, given that’s the wrong way round, unless you assume money taken out of US stocks was parked in bonds last night.

No surprises, nevertheless, from a 0.9% jump in the US dollar index to 97.29.

Greenback Pressure

The rising greenback took its toll on oil markets last night, sending West Texas down US$1.49 to US$58.36/bbl and Brent down US$1.75 to US$63.97/bbl.

The LME reopened to find improved US data pleasing, but the strong dollar a strong counter-influence. Copper fell 1% and tin 2% amongst otherwise smaller, mixed moves.

Gold had a déjà vu session, falling US$19.20 to US$1187.80/oz. If recent history is anything to go by, gold will be back at 1200 in a few days’ time.

The spot iron ore price is rarely affected by the US dollar on a day to day basis, and it posted a third consecutive gain last night in rising US$1.00 to US$62.10/t.

But the Aussie is very much impacted, so it has fallen another 1.2% to US$0.7733.

Today

The SPI Overnight is down 30 points. If Bridge Street sees Wall Street’s drop as mostly reflecting rate rise fears, then in theory all the yield stocks that have been bought up since Thursday will be sold off today. But nothing is ever so theoretically clear-cut.

RBA deputy governor Philip Lowe will be about and talking the Aussie down again today, while the first of the March quarter GDP component releases is due on the form of construction work done.

Suncorp ((SUN)) and Nine Entertainment ((NEC)) will be hosting investor days today while Adelaide Brighton ((ABC)) is among those companies holding AGMs.

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

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