By Greg Peel

The Dow closed down 2 points while the S&P was flat at 1987 and the Nasdaq lost 0.1%.

It was a choppy session on Bridge Street yesterday albeit in a fairly narrow range. Having broken into six-year blue sky, the ASX200 will likely need to consolidate but next week sees the start of the earnings result season merging with the tail end of the resource sector production report season so there should be no lack of individual drivers of direction ahead.

The index spiked up around midday with the release of HSBC’s flash estimate of China’s July manufacturing PMI, which indicated a reading of 52.0, up from June’s 50.7 and ahead of 51.0 expectations. But many saw the spike as an opportunity to square up after the blue-sky run. The Aussie dollar responded in a similar fashion.

Earnings are the centre of attention in the US and as the busiest week of the season plays out, average earnings growth of around 5% is more so-so than supportive when the market PE is sitting at an above average 17.5x. And revenue growth of 3% remains a concern.

Amongst last night’s Dow stock reports, Caterpillar disappointed and its shares fell 3.1%. The heavy machinery company is seen as a global bellwether. Ford beat expectations and managed a 0.3% rise but outside of the Dow, rival General Motors fell short and its shares fell 4.5%, while Facebook was the star, having reported late on Wednesday, as its shares rose 5.2% and floated all social media boats on the day. Yellen must have been caught short.

The flash estimate of US July PMI suggested a fall to 56.3, but that’s from June’s four-year high of 57.3. More disappointing was an 8.1% fall in new home sales in June.

New single-family home sales in the first half of 2014 were down 4.3% on the same period in 2013. Builders point to a decline in mortgage applications, despite ongoing low interest rates, given still-tight lending standards among banks. Slowing momentum in housing construction going into the September quarter is not a good sign for those looking for 3% US GDP growth and confirmation of a rebound out of the weak March quarter.

There was a glimmer of hope for the eurozone last night as its flash estimate of July composite PMI (manufacturing and services) rose to 54.0 from June’s six-month low of 52.8. Most notably, the zone’s peripheral economies posted their best individual figures since 2007. On the other hand, those expecting an imminent UK rate rise were put back in their boxes last night as UK retail sales were shown to rise only a disappointing 0.1% in June.

Global investors are nevertheless focused on the big three economies – US, eurozone, China – and while US data last night were not so flash (albeit weekly new jobless claims fell to an eight year low), the positive PMI readings out of Europe and China were enough to stir up action in the safe havens. Having wallowed since the airliner crash, the US ten-year bond yield last night jumped 5 basis points to 2.51%. I suggested yesterday gold was looking a little vulnerable just above 1300 and sure enough, last night it fell US$10.90 to US$1293.60/oz.

The US dollar index ticked up by a tad once more, to 80.86, while the Aussie is off 0.3% at US$0.9419.

The same PMIs were also cited as the driver of a positive session for base metals, highlighted by a 1.7% jump for copper. Spot iron ore nevertheless fell US70c to US$93.60/t.

And oil markets also paid attention to the PMIs, but were overcome by a greater force. It is becoming clearer that while the EU is intent on stepping up sanctions against Russia alongside the US, energy-related sanctions are not in the mix. Brent crude fell US81c last night to US$107.22/bbl and West Texas fell US$1.00 to US$102.00/bbl.

The SPI Overnight rose 8 points.

The UK will publish its first estimate of June quarter GDP tonight, which should really stir up the rate rise nest, while Germany’s IFO business sentiment survey should provide another clue on the eurozone’s current state. Ditto durable goods orders in the US.

Locally, GUD Holdings ((GUD)) will report its full-year result today.
 

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By Greg Peel

The Dow closed up 77 points or 0.5% while the S&P gained 0.4% to 1981 and the Nasdaq added 0.2%.

As idle as a painted ship upon a painted ocean. So said Samuel Taylor Coleridge in his iconic Rime of the Ancient Trader when describing an ASX200 going nowhere back in 1798. Today’s traders and brokers know how he felt.

Admittedly Wall Street offered little in the way of inspiration on Tuesday night, but the Australian market does appear to have stalled here just over the 5500 mark for now, awaiting direction. Can we stall all the way to result season? Yesterday’s production reports from a couple of big mining names and marginally positive data out of China helped the materials sector to a 0.8% gain yesterday, which was the only sector move of any significance.

China’s GDP grew by 7.5% in the June quarter, exceeding consensus expectation of 7.4% and exceeding the March quarter’s 7.4% growth. Despite many economists revising down their 2014 China growth forecasts earlier this year, GDP is currently running smack on Beijing’s target. What are the odds?

In the month of June, Chinese industrial production rose 9.2% year on year, up from 8.8% in May and exceeding 9.0% expectation. Retail sales rose 12.4% as expected, down from 12.5% in May. Fixed asset investment rose 17.3% in the six months to June, up from 17.2% in the five months to May, exceeding 17.2% expectation.

Economists are now reconsidering their year-end China growth targets, conceding that Beijing’s targeted stimulus policy must be given its due. “Pro-growth fiscal policies, improving external demand, and selective reserve requirement ratio cuts to about 40% of the banking system have played some roles in stabilising the economy,” said Lui Li-Gang, ANZ’s chief China economist, yesterday.

ANZ has now revised up its 2014 forecast to 7.5%, matching Beijing’s target, from 7.2% previously. But it’s not all beer and skittles, as Lui warns: “The commodity inventory data suggest that the downside risks still remain, especially in a sluggish property sector. Alongside with the weak property sales and investment, the unsold housing stock has picked up”.

Janet Yellen was back in the hot seat yesterday, this time testifying to a House Committee. And for the second time in her reign she was forced to back-pedal, this time having to qualify her comments to the Senate Committee on Tuesday night that biotech and small cap stock valuations looked “stretched”. Her comments sparked a deal of controversy with regard the role of the central bank.

The Fed does not have a target for equity values, Yellen quickly explained last night, rather the central bank looks to see if valuations are outside historical norms. “In that sense, I am not seeing alarming warning signals,” she insisted. One gets the impression Yellen’s minders dragged her in after Tuesday’s testimony, gave her another smack around the head, then pushed her back out last night with a copy of the party-line spin.

Her qualification had little impact on the markets in question. The Nasdaq struggled to regain 0.2% but the Russell fell another 0.2%, while the Dow pushed on to a new high at 17,138.

The Fed’s anecdotal Beige Book was also released last night, suggesting improvement in economic and labour market conditions across most regions and noting, in a reference to inflation fears, that price pressures were “generally contained”. Growth across all regions was either “modest” or “moderate”.

No I don’t know either.

US housing market sentiment has risen to a six-month high this month. At 53, the index suggests a welcome return to positive sentiment (50+) from June’s 49. Consensus expected a neutral 50 result. Industrial production rose 0.2% in June, following a 0.5% rise in May, missing expectations of 0.3%. But production is up 4.5% year on year and grew 5.5% in the June quarter, so economists are happy.

The US headline producer price index, indicator of wholesale inflation, rose an annualised 1.9% in June. Consensus expected 1.8%. The Fed’s core PPI measure, ex food & energy, rose by 1.8% when 1.7% was expected.

While hardly cause for fear of runaway inflation, the PPI results did manage to stem the slide in the gold price last night. Gold rallied back US$5.20 to US$1298.60/oz, suggesting it might want to do some work around the 1300 mark.

In US corporate news, Intel’s (Dow) after-market “beat” on Tuesday night saw its shares up 9.3% last night, while Yahoo disappointed and its shares fell 5.1%. But the big news last night was all to do with Rupert getting back to what he loves most – heavily debt-financed, ambitious takeover plays.

Time Warner last night announced it had rejected a combination scrip/cash bid from 21^st Century Fox. Fox has a market cap of about US$70bn and Time Warner about US$80bn. Fox would borrow the cash element which represents around 40%. The assumption is Rupert is trying to create a viable rival to the much larger Disney. The other assumption is that Time Warner shareholders would not be overly thrilled with scrip representing 60% of a company that would have gone deeply into debt in a zero interest rate environment to fund the takeover. The rejection did not shock. But TW shares jumped a whopping 17% on the day and Fox shares fell 5%.

Wall Street knows that when Rupert sinks his teeth in he doesn’t let go.

I noted yesterday that the 0.3% jump in the US dollar index on Tuesday night was akin to a “melt-up”, given dollar volatility has been all but zero for quite some time. Well last night the greenback kicked on, rising another 0.2% to 80.54. The rally came despite another surge in the pound, sending it to a near two-year high against the euro. The pound rallied on news UK unemployment fell to a six-year low in May. This should provide more fuel for BoE rate hike expectations, except that wage growth remains sluggish (as is the case across the developed world right now).

Forex traders did not like the Chinese data, most likely the property element, because at 11am yesterday the Aussie plunged 0.40c. It then proceeded to step-jump up again nevertheless and as at this morning is down only 0.1% to US$0.9365.

LME traders largely ignored the Chinese data and were more swept up in currency moves last night, particularly regarding the pound, before trimming most metal prices. Copper fell 1% although aluminium bucked the trend with a slight gain. Iron ore is unchanged at US$98.00/t.

It was weekly inventory day on the Nymex last night and as usual, traders were surprised. A drop in US crude stocks sent West Texas back up US$1.37 to US$101.52/bbl, temporarily killing off expectations of sub-100. Brent rolled over into the new September delivery front month, and it rose US31c to US$107.19/bbl.

The SPI Overnight closed up 10 points or 0.2%.

NAB will release a June quarter summary of local business confidence today while tonight the flash estimate of eurozone July inflation is due – always a fun occasion. Housing starts in the US will be closely watched.

On the local stock front, Woodside Petroleum ((WPL)) and Mt Gibson Iron ((MGX)) will publish their June quarter production reports.

Rudi will appear on Sky Business at noon.
 

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By Greg Peel

The Dow closed up 5 points while the S&P lost 0.2% as the Nasdaq fell 0.5%.

The Australian market was ultimately becalmed yesterday despite a strong lead from Wall Street. We may well be stuck for while around the 5500 level ahead of the August result season and yesterday there was specific cause for pause ahead of last night’s testimony from Janet Yellen, and today’s Chinese GDP result.

The minutes of the July RBA meeting, released yesterday, were never expected to cause any great surprise, and didn’t. The board did have a little more to say on the progress of the non-mining economy recovery. In June, the minutes suggested:

“The expectation of substantial falls in mining investment, below-average growth of public demand and non-mining investment remaining subdued for a time implied that the pace of growth was likely to be a little below trend over the rest of this year and into the next, before gradually increasing.”

And the July minutes suggested:

“There had been a gradual improvement in the pace of activity in the non-resource sector and forward-looking indicators suggested that further strong growth in residential construction was in prospect, despite some easing of conditions in the established housing market over recent months. After picking up through last year, household consumption growth appeared to have eased, while non-mining business investment was picking up gradually.”

A mixed report card, but ever so slightly more positive, one might suggest. Certainly no cause to expect the central bank is contemplating a rate cut.

Wall Street opened to the upside, with the Dow jumping 65 points on the open to smash through the previous closing and intraday highs. Street-beating results from big banks and Dow stocks Goldman Sachs (up 1.3%) and JP Morgan (up 3.5%) floated all financial sector boats.

But that’s where it ended. The world held its breath as Fed chair Janet Yellen began her prepared testimony to the Senate Committee and then moved into the Q&A session. Would Yellen offer any further clues as to when the Fed sees the first rate rise as being necessary?

As it was, interest rate talk was not the headline. What shocked the market was the Fed chair’s call that valuations on biotech and social media stocks looked “stretched”. As one might imagine, down went the Russell and down went the Nasdaq, with the former closing down 1.0% on the session and the latter 0.5%. Then the cries went out: What the hell is the Fed doing making trading calls?!!

Welcome to the new Federal Reserve. Gone are the days when the Fed played the role of omniscient but silent overseer, simply controlling capital flows through the banking system and allowing stock markets to find their own levels, as is the “free market” concept of price discovery. Now the Fed is a visible presence, prepared to control all aspects of the market through ultimate verbal power. The true free marketeers on Wall Street are having apoplexy. But there are many who believe the prevention of bubbles is a step forward in the post-GFC world. The Fed has come under a lot of criticism from free marketeers who insist relentless QE has nurtured a bubble on Wall Street, so now the Fed is responding. At her last press conference, Janet Yellen suggested the stock market was “fairly” valued. Last night she suggested perhaps biotechs and social media stocks looked “stretched”.

Half of Wall Street believes the Fed has no right to make trading calls. The other half is comforted by this benevolent hand. One thing we do know is that having come this far, the Fed is not about to clam up again.

By midday, the Dow was down 49 points. But it grafted back, as is often the case these days on any sharp drop, to a flat close. There are many who agree with Yellen’s assessment of the momentum stocks, but this does not apply to the blue chips. Social media stock Yelp, for example, is trading on a PE of 420x. The Nasdaq and Russell also recovered some lost ground in the afternoon nonetheless.

But what about interest rates?

Ultimately Yellen’s testimony did little to provide more clarity. The Fed could accelerate its plans to raise interest rates, Yellen suggested, if the jobs market continues to improve more rapidly than anticipated. But that time has not arrived, she qualified, given “considerable uncertainty” surrounding the economic outlook. In other words, NFI. Yellen has no more foresight than the market, and as such the US ten-year bond yield was unmoved at 2.55%.

The forex markets must have been expecting a more dovish insistence form the Fed chair nevertheless, given the US dollar index rose 0.3% to 80.38. In the context of the greenback’s near zero volatility of late, this is akin to a “melt-up”. And the dollar jumped despite the earlier release of the UK’s June CPI, which printed 1.9% when 1.6% was expected, up from 1.5% in May, and further underscored the likelihood of a UK rate rise sooner rather than later.

The dollar jump was not very helpful for gold, which tumbled through support at 1300 and is down another US$13.80 to US$1293.40/oz. But the Aussie fell (woohoo!), albeit only by 0.2% to US$0.9374.

The dollar jump likely also provided oil markets with a bit of a push. Having taken a breather on Monday night, last night the oils resumed their geopolitical premium reversal, with Brent dropping US84c to US$104.99/bbl and West Texas dropping US$1.04 to US$100.15/bbl.

When the WTI price falls below triple digits, Americans all feel a bit happier. It’s good for consumers, and good for the economy in general, bar, of course, the energy sector, which is a big slice of Wall Street’s market cap. It’s the perpetual yin and yang.

A fall in inventories sent aluminium up 1% in London last night but all other metals were steady ahead of today’s Chinese GDP and July data releases. Spot iron ore rose US10c to US$98.00/t.

The SPI Overnight rose 6 points.

So strap yourself in in preparation for China’s data drop later this morning as June quarter GDP is announced (consensus 7.4%) and July industrial production, retail sales and fixed asset investment numbers are released.

We may yet be looking at more controversy from The Hill, as tonight Yellen provides another testimony, this time to a House Committee. The Fed Beige Book is also due, along with US industrial production and housing sentiment releases.

Locally, Rio Tinto ((RIO)) will publish its June quarter production report today as will Iluka Resources ((ILU)). Fortescue Metals ((FMG)) will formally publish its report but having pre-released the major details last week, Fortescue is unlikely to provide any surprises.

Rudi will appear on Sky Business at 5.30pm.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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