The Overnight Report: More Minutes Of Confusion

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By Greg Peel

The Dow closed down 162 points or 0.9% while the S&P lost 0.8% to 2079 and the Nasdaq fell 0.8%.

Mystery

The motivation behind Tuesday’s sudden 2pm dumping of bank stocks on the local market will remain a mystery, other than perhaps someone, somewhere, decided to pocket the CBA div and switch into something else altogether. Yesterday the banks all flew back to Tuesday’s starting point immediately from the opening bell, and stayed there.

We can thus also throw out any theories that the Chinese market prompted the late fall on Bridge Street on Tuesday. Having fallen 6% on Tuesday, yesterday the Shanghai index was down another 5% at around lunchtime in Sydney. The ASX200 wobbled, but quickly regained its ground.

By the time Bridge Street was closing Shanghai had begun to recover, before ultimately closing up over 1%. The assumption is the government’s Plunge Protection Team, who had said they were not going to do anymore buying, had a change of heart.

Yesterday’s local market also featured another round of beats and misses amongst reporting stocks and some solid moves in either direction as a result. Woodside Petroleum ((WPL)) was one stock that surprised with a strong result and consistent dividend, helping the energy sector to join the banks with a 2% gain yesterday, thus reversing Tuesday’s oil price-related tumble.

Unfortunately that trade’s not looking so flash this morning.

Between the banks, energy and some surprise buying in supermarkets, yesterday the ASX200 recovered what it had lost on Tuesday. But hang on to your hats, the SPI Overnight closed down 48 points this morning.

Dovish?

One reason the SPI is down hard is because oil prices have turned tail again. Wall Street opened to the downside last night on some lingering concern over China but when the weekly US crude inventory data hit the wires, oil prices crashed once more and US stock indices followed suit.

Increasing US inventories do not bode well when the end of August signals the end of the US summer driving season and a seasonal drop-off in fuel demand through to November. WTI crude fell over 4% last night and just stopped short of reaching the thirties.

The Dow was subsequently down over 200 points in the morning session before someone accidently leaked the Fed minutes at 1pm, ahead of the usual 2.30pm release. Shortly after 2pm, the Dow was back in the green.

We could carefully deconstruct the minutiae of the language of the various FOMC member views minuted in July but realistically we’d only arrive at the same old conclusion – the Fed might raise in September, or might not.

The computers clearly decided the language was more dovish than hawkish (yes, language algorithms make these calls and respond in seconds, long before any human can get their head around the implications), and subsequently Wall Street rallied back on the assumption September is now less likely. But if commentary on US business television can be considered a reasonable sample set, it appears most still feel September will be lift-off month.

Either way, US stocks turned tail again in the afternoon and finished lower. If we look at it from a purely technical perspective, the S&P500 yet again fell through its 200-day moving average from the open last night, prompting the usual buying response. The fade-off in the afternoon took the S&P to a close of 2079, and right now the 200 MA sits at 2078.

The US bond market and currency markets clearly thought the minutes were more dovish than hawkish. The US ten-year bond yield fell 7 basis points to 2.12% and the US dollar index fell 0.6% to 96.45.

Commodities

Commodity prices and Fed policy are inexorably linked, even if central banks try to ignore volatile short-term fluctuations in food and energy prices. There is no denying structurally lower oil prices and their impact on inflation. The more oil falls, the more the market begins to feel a rate rise is off the agenda.

West Texas fell US$1.83 or 4.3% last night to US$40.55/bbl, and stock market traders stood and watched agape to see whether the thirties might be reached. It’s worth noting, nevertheless, that WTI rolls over to October delivery tonight and that month closed a little higher, at US$40.95/bbl.

Brent is already on October delivery and it fell US$1.68 or 3.5% to US$46. 87/bbl.

The panic apparent in iron ore futures prices on Tuesday night, as I noted yesterday morning, did not come to pass. Iron ore is down US10c to US$55.90/t.

The drop in the US dollar was never going to save oil prices last night but it did provide some support for base metals, which had been hammered on Tuesday night on Chinese stock market fears. Copper did fall another 0.3% and aluminium was largely steady, but the other metals all rebounded around 1%.

Gold traders looked at the Fed minutes, the fall in US bond yields and the drop in the US dollar and decided to buy. Gold is up US$16.60 to US$1134.10/oz.

All of a sudden there’s a lot of talk on Wall Street that gold might be the place to be. If the Fed does raise, and the US dollar jumps, the impact on emerging market currencies will be supportive of gold. If the Fed doesn’t raise, and the dollar falls, gold will be supported.

So the theory goes.

The Aussie dollar is a tad higher at US$0.7351.

Today

The SPI Overnight, as noted, closed down 48 point or 0.9%.

Thursdays are the shocker days in any result season, and today’s long list of reporters includes AMP ((AMP)), Brambles ((BXB)), Fortescue Metals ((FMG)), Origin Energy ((ORG)), Qantas ((QAN)) and Wesfarmers ((WES)).
 

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