The Overnight Report: Out Of Service

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By Greg Peel

The Dow closed up 46 points or 0.3% while the S&P gained 0.3% to 2186 and the Nasdaq rose 0.5%.

Not with a Bang

Glenn Stevens' last monetary policy statement as RBA governor, released yesterday, was benign, and little different to the July statement. After the May rate cut economists were rapidly pencilling in August as the next cut ahead of more in 2017, but by yesterday morning no one was expecting an August cut anymore.

Inflation, or lack thereof, had been the big issue back in May but as we await the release of the June quarter GDP result this morning, the fact it could be as high as 3.4% growth rather puts the need for further stimulus into question, low inflation or not.

Yesterday saw the release of the last component of GDP, being the current account. The current account deficit surprised economists by dropping down to $15.5bn from the March quarter’s $20.8bn when $20.0bn was expected for June, but then the March quarter result was revised down to $14.9bn so what’s the point in being surprised? In fact the deficit widened.

I use the word “fact” advisedly.

The terms of trade in theory rose 2.3% in the June quarter thanks to stronger commodity prices but it’s still down 5.7% from a year ago. Yesterday’s data did not alter economists’ expectations that the pace of growth will have slowed to around 0.5% in June from a shock 1.1% reading in March, but that annual growth will remain an envy-of-the-developed-world 3.4% or thereabouts.

It was a lacklustre session on Bridge Street following no lead-in from Wall Street but clearly there was some give-back after Monday’s surprising surge. Yield stocks that were hot property on Monday eased back. The banks dropped 0.5% for example.

Monday’s rally was all about the US jobs report which apparently killed off, many had decided, the chance of a September Fed rate hike. Yesterday we saw local rate considerations at work. When the current account numbers came out, the ASX200 slipped, likely because they did not alter strong GDP expectations and therefore provided no reason for an RBA rate cut.

After recovering thereafter, the ASX200 slipped again in the afternoon when the RBA statement offered no hint there may have to be another rate cut sometime soon.

The Aussie didn’t do much, given no one had expected anything from the RBA. But that all changed overnight. Glenn Stevens is probably relieved he’s getting out.

No Chance

The Dow initially dropped 40 points from the opening bell last night on the release of the US services sector PMI for August, which showed a sharp drop to 51.4 from 55.5 in July. It’s the lowest reading since February 2010.

But the weakness was short-lived as those investors relieved by weak data, which suggest the Fed will not be hiking in September, moved in and started buying.

The US dollar index plunged 1.0% to 94.84. No doubt to Phil Lowe’s frustration, the Aussie has shot up 1.3% to US$0.7683. The US ten-year bond yield dropped 5 basis points to 1.54% and gold leapt US$22.70 to US$1349.40/oz.

Forget September, we can now all spend three months debating the possibility of a Fed rate rise in December.

We’re back in TINA mode – one might as well buy stocks as there is no other alternative. The Nasdaq hit a new record high last night. It’s hard to find a Wall Street commentator who doesn’t like the high-growth tech sector at present. It’s also hard to find anyone who likes the high-yield sectors such as utilities and telcos, other than the people who keep buying them. Where else can one source income? TINA.

The story in Australia is very similar.

Commodities

A big drop in the US dollar should be good news for commodity prices, but there was little evidence of it last night. Other than in gold of course, but that’s not a commodity.

Oil prices continued to drift lower after the disappointment of the Saudi-Russia announcement of, effectively, no production freezes probably ever. West Texas crude is down US21c at US$44.88/bbl.

Trading on the LME continued to be mixed and largely sedate, although zinc did drop 2% and lead rose 1% while the others did nothing much. Base metals continue to be influenced by individual demand/supply equations.

Iron ore fell US20c to US$58.60/t.

Today

The SPI Overnight closed down 10 points or 0.2%.

The local GDP result will be out late morning.

The Fed will publish its Beige Book tonight which will no doubt be stuck on the usual assessment of modest or moderate growth across Fed regions.

Among another handful of ex-divs today on the local market, Brambles ((BX)), Cochlear ((COH)) and Qantas ((QAN)) stand out.

Rudi will be hosting Your Money, Your Call Equities tonight on Sky Business, 8-9.30pm.
 

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