The Overnight Report: Caution

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By Greg Peel

The Dow closed up 6 points while the S&P lost 0.1% to 2050 and the Nasdaq was flat.

Optimistic

It was an extraordinary day on Bridge Street yesterday considering just how weak markets were locally, and globally, heading into last weekend. It would be easy to say the 2.3% surge was a typical rebound out of the prior terror-related panic sell-off, but there was no such sell-off. The ASX200 traded down on Monday but recovered the 5000 technical level by day’s end.

There followed flat markets in Europe and a strong session on Wall Street and somehow the Paris attacks have acted counter-intuitively – as a reason to buy. But yesterday was not just one simple surge on the open for the ASX200. There was an opening pop but thereafter it was a steady upward trajectory throughout the session, aided by a round of local economic optimism.

The minutes of the November RBA meeting, released yesterday, were decidedly, if not cautiously, upbeat. “Moderate economic expansion had continued,” the board noted, and “the prospects for an improvement in economic conditions had firmed a little over recent months”.

The board also seems now quite content that the housing bubble has subsided but did give a nod to the “relatively high unemployment rate” as suggesting spare capacity in the economy would linger. The meeting was of course held before the release of the startling October jobs numbers.

The hawkishness contained in the minutes would appear to put paid to any rate cut speculation, although the board did reiterate that the inflation outlook still offered “some scope for further easing”. Call that the put option that provides the downside hedge for an upside trade on the Australian economy.

At Commonwealth Bank’s AGM, held yesterday, the CBA chairman declared the bank was optimistic about the transition away from the mining investment boom, albeit acknowledging it would take some time. ANZ’s chief economist weighed in, on the release of the weekly ANZ-Roy Morgan consumer confidence survey, suggesting that the recent trend provided “a good sign ahead of the critical Christmas season”.

And of course overnight, oil prices had rebounded strongly. There was thus a little bit for everyone yesterday – energy rallied 3.7% (although oil prices were right back down again last night), the banks rallied 2.3% and consumer discretionary rallied 2.7%. But gains were solid across all sectors nonetheless. It was a session in which the most popular stocks were the least popular of the previous weeks and months – the likes of BHP, Santos, Woolies and Telstra.

While there was an Australia-specific element to yesterday’s local surge, the macro influence of post-Paris buying nevertheless underscored and flowed across the globe. The Japanese and Hong Kong markets were both up 1.2%. London was up 2.0%, Germany 2.4% and France, the centre of attention, jumped 2.8%.

In Europe there is no doubt an expectation that if the ECB had harboured any doubt about extending QE, Paris snuffed those out. News of French fighter planes launching an all-out attack on IS, with Russia now also redirecting its attention to IS, is also likely a source of revenge-fuelled optimism.

Jittery

But none of the above means Europe, and the world, is not on edge. Wall Street opened strongly again last night, buoyed by a positive CPI reading, but when the Dow was up over 100 points news came through after the close of the European markets that a football stadium in Hanover, where Germany and the Netherlands were set to play a friendly in front of Angela Merkel, had been evacuated and the game cancelled.

It was all about a suspicious suitcase and came to nought, but it was enough to turn Wall Street around and send the indices back to flat closes. Oil prices fell back again, which also helped to sour the mood.

The US CPI rose in October for the first time in three months, up 0.2%. The annual rate remains a paltry 0.2% but that’s all about oil prices. The core CPI, ex food &energy, also rose 0.2% in the month but is up 1.9% annually, just shy of the Fed’s 2% target.

There is nothing in these numbers that would stop the Fed raising next month.

Wall Street was also surprised by some very strong earnings results from Dow components Wal-Mart and Home Depot. We might say Wal-Mart is a supermarket on steroids and Home Depot is Bunnings on steroids, and given the sort of crowds one sees at such hardware-houses on weekends we could arguably call both consumer “staples”.

The 4% share price jumps both stocks enjoyed would reflect some return to confidence in the US consumer in the wake of shocking results from US department stores, representing consumer “discretionary”, but also representing “obsolete model”.

Overhanging Wall Street is nevertheless the rising US dollar, which was up another 0.2% last night to 99.59 on its index as the euro continued its fall.

Commodities

It appears the geopolitical element which sparked a rally in oil prices on Monday night was no more than a short-covering snap-back. Last night oil markets were back to worrying about just what the upcoming weekly US inventory data would reveal and prices fell all the way back from where they had bounced to. West Texas is down US$1.33 or 3.2% to US$40.73/bbl and Brent is down US$1.29 or 2.9% to US$43.58/bbl.

The US CPI data did nothing to gladden the hearts of metals traders, given Fed rate rise and strong greenback implications. On the LME, only aluminium was spared last night as copper, lead and tin fell around half a percent while nickel fell 2% and zinc fell 3%.

Iron ore fell 3% as well, down US$1.50 to US$45.80/t.

Gold fell US$10.30 to US$1071.60/oz.

The Aussie did not much move during yesterday’s session, so its 0.4% increase from this time yesterday to US$0.7119 is not about the RBA minutes and is in defiance of the stronger US dollar. Maybe offshore forex traders took over the RBA trade.

Today

The SPI Overnight closed down 24 points or 0.5% which is to be expected given yesterday’s surge and the fall in commodity prices overnight.

Locally we’ll see September quarter wage price data today in the lead-up to our GDP result in early December. Tonight it’s the Fed’s turn to release minutes.

Orica ((ORI)) will release its FY15 result today amidst a very busy day of AGMs.
 

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