The Overnight Report: The Day After

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By Greg Peel

The Dow closed up 155 points or 0.9% while the S&P gained 0.7% to 2040 as the Nasdaq rose 0.2%.

Odd Jobs

Congratulations to the three hundred Australians who managed to find a job last month. Commiserations to the far greater number who abandoned hope of finding a job in Australia’s currently difficult economy.

The market saw a fall in Australia’s unemployment rate to 5.8% from 6.0% as reason to believe there is no way the RBA can cut its cash rate further. The Aussie had already spiked overnight as the US dollar fell on the Fed’s policy pullback, and kicked again yesterday on that 5.8% number. It’s kicked even further overnight on ongoing greenback weakness to be up 1.1% over 24 hours at US$76.43, up around two cents from pre-Fed.

Yet economists had forecast an addition of 13,500 jobs in February and the result was a mere 300. Not that economist forecasts ever get anywhere near the complete lottery that is the monthly ABS jobs data. The fall in the unemployment rate was due to a sharp fall in the participation rate. In September, October and November, Australia added a net 124,700 jobs. In December, January and February, Australia has lost a net 6,600 jobs.

It is not unusual for jobs growth to ease back after such a spurt, but we are reminded that in his March monetary policy statement, the RBA governor suggested, in relation to policy setting, “Over the period ahead, new information should allow the Board to judge whether the improvement in labour market conditions is continuing”. Well, it’s not.

But along with the currency, the Australian stock market kicked higher on the release of the unemployment number. Just prior, the opening Wall Street-inspired rally had begun to fade. There was a sharp jump up to 50 points higher on the session for the ASX200, and that’s pretty much where we stayed for the rest of the day.

The rally was led out by energy (+2.8%) and materials (+2.3%) which is understandable given the jump in commodity prices provided by the weaker US dollar. But the real clout came from a 1.1% gain for the banks. I noted yesterday that US bank stocks had fallen in defiance of the rest of the market post-Fed on Wednesday night because banks need higher rates, and subsequently suggested the local banks might come under pressure yesterday if the Fed had opened the door for an RBA cut. But 5.8% unemployment! No cut, the market has decided.

The RBA’s April statement is going to make for interesting reading.

All is forgiven

I note every time there is a Fed meeting that the smart money tends to let the headless chooks run around for the couple of hours post-release and instead take a night to think about it before making a more studied investment decision the next day. Wall Street did rally post-Fed, but the more thoughtful investors decided to push on with it more emphatically last night.

The two main drivers were a US dollar which has fallen another 0.9% overnight to 94.77 on its index and the WTI crude price, which has retaken US$40/bbl. WTI fell through 40 last December and began its rapid slide down to 26 in February, sending global stock markets into a spiral, not the least Wall Street. Well with oil now back at 40, the Dow last night turned positive for the year. The S&P traded positive for the year but eased a little toward the close.

The indices were led out by the energy and materials sectors once more, but the weaker greenback also provided support for the significant number of multinational industrials. Stocks like Dow component Caterpillar, which is not only tied to commodity prices but derives more than half of its revenue offshore, are making a comeback.

Meanwhile, the star performer in the broader market last night was FedEx, which shot up 10% on its earnings result release. FedEx is a direct beneficiary of the rapidly growing on-line shopping business, but it is also a company for which lower oil (and while we may be back at 40 that’s still a long way from 100) means lower costs.

It would appear that if the US economy can find a sweet spot of balance between an oil price that is low enough to force supply curtailment and provide a boost to oil consuming companies and households, but not so low as to threaten economic meltdown, there is cause for optimism. And the Fed is being supportive by keeping a lid on the US dollar.

Commodities

West Texas crude is up US$1.61 or 4.2% at US$40.12/bbl and Brent is up US$1.05 or 2.6% at US$41.34/bbl.

The LME had its first chance to respond to the Fed last night having closed on Wednesday night just before the statement release. The US dollar index is down 2% in that time, so no surprise that copper is up 1.5%, lead and tin up 2%, nickel up 2.5% and zinc up 4%. Only aluminium struggled, up a mere 0.3%.

Iron ore rose US$2.90 to US$55.40/t.

Gold, on the other hand, has not been able to push to new 2016 highs despite another 1% fall in the greenback overnight. It’s down US$4.90 at US$1256.40/oz.

Today

Yesterday was expiry day for the SPI and the new June front month contract closed up 24 points or 0.5% overnight.

Today will see the changes to the components of the ASX/S&P indices announced two weeks ago become effective.

Tonight will see an equivalent rebalancing of the S&P500 in the US, along with the quarterly quadrupled witching expiry of equity derivatives. There could thus be some heightened volatility, particularly at the close.

Premier Investments ((PMV)) will release its earnings report today.

Rudi will link up with Sky Business through Skype at around 11.15am to discuss broker calls.
 

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