The Overnight Report: No Correlation

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By Greg Peel

The Dow closed down 34 points or 0.2% while the S&P rose 0.1% to 2058 and the Nasdaq gained 0.3%.

Eager

It was another up and down day on the local bourse yesterday, with up winning in the end. Wall Street had closed modestly positive on Friday night despite a weak jobs number, although that weakness likely keeps the Fed at bay in June.

The numbers to consider on the day were the Chinese trade data and the local ANZ job ads series.

Chinese exports fell 1.8% year on year in April having risen 11.5% in March. Imports fell 10.9% having fallen 7.5% in March.

The export number disappointed, as it appears to have killed off what looked like a Chinese economy finally in recovery following various stimulus measures. The import number is troubling as this reflects the new, domestic-focused economy Beijing is trying to engineer. But we go through this same charade every year – Chinese numbers are not seasonally adjusted, and thus often wildly distorted on the move into and out of the Lunar New Year holiday.

It appears that’s how the Australian market took the results yesterday. The materials sector was the only sector to finish in the red, but only by 0.6%. It’s not the stuff of panic. Energy, on the other hand, rose 1.2% to be one of the better performing sectors on the day.

Australia had the chance to respond to the Chinese numbers before the rest of the world. Overnight, the rest of the world has panicked. More on that in a moment.

Australian job ads fell 0.8% in April and remain broadly unchanged in number since October last year. “The number of job ads has been broadly flat now for six months,” ANZ noted. “This follows a period of substantial growth in employment, and some modest slowdown should probably not be surprising”.

So all up, no great surprise in either the local or Chinese numbers, it would seem. By the close on the ASX every sector bar materials had put on a relatively even performance to the upside, with consumer staples probably the only stand-out with a 1.7% gain. The banks were up 0.5% on Commonwealth Bank’s ((CBA)) not too bad result, while Orica’s ((ORI)) result was poorly received but again, probably not a major shock for a company selling explosives to miners.

Right now it looks like the market wants to be above 5300, and so doing push towards 5400 and beyond. The RBA has cut and will likely cut again, the Aussie has come off strongly as a result and also thanks to a stronger greenback, and in another couple of months we will have a new-look parliament, which throws up all sorts of possibilities. Majority in the Senate? Now that would be a breath of fresh air, whichever side of the aisle you sit. Australian governments of both stripe have been hamstrung for a decade.

Commodities

The Australian market may not have seen the Chinese trade numbers as particularly ominous but that’s not how commodity markets saw them last night.

West Texas crude is down US$1.32 or 3.0% to US$43.24/bbl and Brent is down US$1.70 or 3.8% to US$43.63/bbl. Oil markets were further affected by the announcement out of Saudi Arabia that the Crown Prince had moved aside the longstanding oil minister and appointed his own technocrat, only serving to fuel uncertainty.

Base metals markets have been hit in recent selling by the speculators and commodity funds who chased prices up in the February rebound, and last night, thanks to China, that trickle became a flood. Lead fell 1%, tin 1.5%, copper 2%, aluminium and zinc 2.5% and nickel 4.5%.

Iron ore fell US$2.10 or 3.6% to US$55.60/t.

Commodity prices were not helped by the US dollar, which rose another 0.3% on its index to 94.15 thanks to a lower yen, which responded to talk out of Tokyo that currency intervention has not been ruled out.

Gold is down US$24.30 at US$1263.40/oz.

Nor were commodity prices helped by an article appearing in the China People’s Daily – the Communist Party propaganda rag – suggesting the government was not prepared to use excessive investment or rapid credit expansion to counter subdued growth.

The Aussie is down another 0.7% at US$0.7314 thanks to the stronger greenback and weaker commodity prices.

Material Move

The US materials sector led down Wall Street last night, aided by energy. But the firm correlation with oil prices seen earlier in the year is now but a memory and other sectors managed to post sufficient gains to offset the resource sector drag, particularly healthcare. Volatile biotech had a good day, helping the Nasdaq up 0.3% when the Dow was down 0.2%.

There is much talk on Wall Street now that the market has run about as far as it can, and if nothing comes along to provide the next shot of upside adrenalin, surely it must go down. Many are worried that oil prices are set for a pullback. While the correlation has abated for now, there is little doubt it will be back in spades were oil prices to fall out of bed once more.

The S&P500 remains little changed for the year.

Today

The SPI Overnight closed down 16 points or 0.3%.

China will release inflation data today. Too strong and it will kill off hopes of further stimulus. Too weak and it will exacerbate slowdown fears.

Incitec Pivot ((IPL)) will release its earnings result today and QBE Insurance ((QBE)) will hold an investor day.

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

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