The Overnight Report: Waiting…

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By Greg Peel

The Dow closed down 3 points while the S&P fell a point to 2017 and the Nasdaq lost 0.1%.

I was assuming, or at least hoping, I would be writing this Report this morning knowing what the outcome of the Greek parliamentary vote had been, but as I write debate is still ongoing in Athens despite the midnight (in Brussels) deadline being passed.

Questions

The highlight of Yesterday’s session on Bridge Street was the release of Chinese monthly and quarterly data. The unfortunate aspect of that release was that the Australian market, and the world, should be rather thrilled about the numbers, but that is not the case.

China’s June quarter GDP came in at an annual rate of 7.0% when 6.8% was expected, right on Beijing’s 2015 target. Industrial production in the month of June rose 6.8% year on year, up from 6.1% in May and ahead of 6.0% forecasts. Retail sales clocked 10.6%, up from 10.1% and ahead of 10.2% forecasts. Fixed asset investment rose 11.4% in the year to June, in line with May but ahead of 11.2% forecasts.

The world should be breathing a sigh of relief, on indications China’s economy may have stopped slowing in the quarter thanks to Beijing’s stimulus efforts, but the general response is one of “yeah, right”. Having lost all credibility in its orchestration of the Chinese stock market bubble and then prevention of its bust, the Chinese government has now again raised the question of just how reliable official data really are. Economists use other data points such as electricity and vehicle sales for example to estimate Chinese growth, and these simply do not corroborate yesterday’s results.

The ASX200 did kick higher yesterday after the release of the Chinese data, but realistically the bulk of the 1% rally was already established beforehand. It was another “risk-on” session following Tuesday’s big jump, despite stock markets around the globe deciding to calm down on Tuesday night ahead of the Greek vote. Yesterday showed hints of a “FOMO” rally – fear of missing out.

The big move up was in the energy sector, which rose 2.5% because oil prices did not tank following the Iranian agreement. Consumer staples chimed in with 2.1%, but interestingly consumer discretionary was still one of the better performers on the day at 1.3% despite the miserable consumer confidence numbers implied by yesterday’s Westpac survey results.

There seems to have been general index buying going on. It didn’t seem to bother anyone that the Shanghai index fell 3%, and after falling 2% the day before, is beginning to look scary again as suspended stocks come back on line.

Yellen it Loud

September is clearly back in the frame for the first Fed rate hike following last night’s testimony from the Fed chair before the House financial committee. Yellen reiterated that she expected to raise the rate at some time this year, and further suggested that while offshore issues, mainly Greece and China, are of concern, they are not sufficient to derail the US economic recovery and thus, by implication, would not hold up the decision to hike.

On Yellen’s testimony, the US dollar index jumped 0.5% to 97.15. One might also expected a further sell-off of US bonds, but bond markets had their eyes on other matters, specifically pictures on the TV of Molotov cocktails being thrown at riot police in Athens. The “flight to safety” trade, ahead of the Greek vote, overcame the rate rise trade in sending the US ten-year yield down 5 basis points to 2.35%.

US stock markets also became nervous when images of rioting appeared, and the indices subsequently turned south. But it had been a quiet session of relatively small movement up to that point, and ultimately a flat close.

Support for a September rate hike was also provided by last night’s US data releases. The Fed Beige Book noted growth in all twelve Fed regions. The producer price index rose 0.4% in June when 0.2% was expected. Industrial production rose 0.3%, and the Empire State activity index swung to plus 3.9 from minus 2.0 last month.

The earnings result highlight on the day was that of Bank of America, which beat expectations and enjoyed a 3.2% share price jump.

Commodities

On Tuesday night oil prices closed higher on a “buy the fact” trade following the long awaited announcement of a deal with Iran. Last night was more indicative of the fear of Iranian implications, on top of record production from Saudi Arabia in June and signs of a glut of US oil products, leading to lower crude demand.

West Texas fell US$1.69 to a three-month low of US$51.62 and Brent fell US$1.63 to US$57.05/bbl.

LME traders wrestled with what appeared to be positive numbers out of China, albeit if they are accurate they would reduce the likelihood of further stimulus, and the stronger greenback. Ultimately base metal prices headed in opposite directions, with copper and nickel falling somewhat and aluminium, lead, tin and zinc rising.

There was good news for nervous iron ore miners last night, with a US70c gain to US$50.10/t in the spot iron ore price.

The stronger greenback sent gold down another US$6.00 to US$1148.90/oz.

The stronger greenback also forced strong selling in the Aussie, which is down 1.0% to US$0.7378, representing a six-year low.

Today

Janet Yellen will tonight continue her testimony, this time before a Senate committee. Given she has remained “on message” so far, nothing new is expected out of tonight’s session.

The eurozone will see inflation and trade data tonight, but attention will be drawn to the ECB policy meeting. Mario Draghi is not expected to fiddle with his QE setting, which appears to be working so far, but rather what to do about Greece and Geece’s undercapitalised banks will be the question.

Locally, Rio Tinto ((RIO)), Iluka Resources ((ILU)), Whitehaven Coal ((WHC)) and Woodside Petroleum ((WPL)) will release June quarter production reports.

But clearly, the Greek outcome will impact upon markets this morning, one way or the other.

SPI futures are up 5 points.

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