By Greg Peel

The Dow closed up 64 points or 0.4% while the S&P rose 0.2% to 2114 and the Nasdaq added 0.5%.

Misleading

Yesterday on the local market we saw another plunge from the open as the sell-off continued. At 11.30am a positive surprise on GDP popped its head up but was quietly steamrolled over by a market driven by technical momentum and a fundamental ongoing rise in bond rates in Germany which is translating to bond rate rises in the US and across the globe.

Higher global bond rates make Australia’s yield stocks less attractive, so it’s not just domestic sellers in there trashing our market at present.

Joe Hockey took credit for yesterday’s positive GDP result which is surprising, given that over which he has any control registered 0.0% growth. But Joe’s just the most recent in a long line of treasurers who think they can spin any numbers to political advantage. The 0.9% quarter on quarter growth result was an improvement on December’s 0.5% but not enough to prevent the annual growth rate falling to 2.3% from 2.5%.

If we split the result into exports and domestic demand we see 0.5 percentage point growth for the former, as we were tipped off about in Wednesday’s current account numbers, and a flat result for the latter. Household consumption rose 0.3ppt and inventories rose 0.3ppt but business investment fell 0.5ppt and public spending was flat. Inventory growth is a worry, as it may imply growing confidence in the ability to sell more product or it may imply misplaced confidence, over-buying and a lot of discounting required ahead to move surplus stock.

In terms of the export result, we do tend to forget that the “mining boom” is not over, it’s just matured. The domestic economy is no longer benefiting from mining capacity investment but increased supply is now providing for greater volumes of exports, sufficient to offset commodity price weakness. But with business investment still heading south, and a lot more of the decline in “mining” investment to come (mostly LNG), it’s hard to see just what is going to spark up the non-mining side of the economy.

The government’s small business package? I think the emphasis is on the word “small”.

Whereto?

On a technical basis the next level of support for the ASX200 is 5575. Two weeks ago we traded at 5574 intraday before the bargain hunters moved in and eventually we rallied to back above 5750. Failure to hold that has seen us drop back under 5600, closing at 5583 yesterday with no cavalry in sight.

Last night the US ten-year bond yield jumped another 10 basis point to 2.37%. This was largely a result of the ECB increasing its 2015 eurozone inflation forecast to 0.3% from 0.0% at last night’s policy meeting. The German ten-year yield jumped 20 basis points to 0.89%.

Today’s action will be a test of whether the local bargain hunters still see the same level from two weeks’ ago as a bargain. The fundamentals of rising global bond yields are very much pressuring the market the other way. On Monday morning the SPI futures closed up 18 points and ASX200 subsequently fell 99 points. Yesterday morning they were up 17 and we fell 52. This morning they’re up 6 points.

Maybe the day to buy is when the SPI Overnight closes down.

Beige

Last night’s ADP private sector jobs report in the US showed 201,000 jobs added in May, up from 165,000 in April and the best result in four months. The result fell short of forecasts of 215,000, but the number that matters is tomorrow night’s non-farm payrolls, and Wall Street will reserve judgement until that is released.

The 201,000 result was “okay”, just as April’s non-farm payrolls result was “okay”. Last night the Fed released its regular anecdotal assessment of the US economy, its Beige Book, and declared the pace of growth to be “modest to moderate”, and suggested there are signs of a rebound out of the weak first quarter.

There is nothing here to imply either a sooner Fed rate rise or a later Fed rate rise. Thus the US stocks indices meandered through the session to a modest gain.

The US dollar index fell again, by 0.6% to 95.34, on another move up in euro thanks to the ECB’s inflation forecast. The RBA will be relieved that 78 at least seems to be the ceiling on the Aussie for now, as despite yesterday’s positive GDP result and another drop in the US dollar index, the Aussie is steady at US$0.7779.

Commodities

That the ECB should see a brightening outlook for the eurozone economy is not good news for gold bugs, so despite another fall in the greenback, gold fell US$8.40 last night to US$1184.60/oz.

LME traders are happy to sit it out until the US jobs numbers hit the wire, hence base metal prices were again mixed on small moves.

Iron ore rose US50c to US$62.60/t to mark a three-month high.

Oil traders will also be keeping an eye on Friday night’s jobs numbers but for them another focus of attention will be Friday night’s OPEC meeting. Although no one expects Saudi Arabia to waver from its stoic stance against US shale oil overproduction, there is a slight chance smaller producers may force at least some capitulation on OPEC quotas. Thus the feeling is a reinforcement of current quota levels will send oil prices south on disappointment.

Squaring up is thus sensible, and last night West Texas fell US$1.45 to US$59.61/bbl and Brent fell US$1.62 to US$63.76/bbl.

Today

As noted, the SPI Overnight closed up 6 points.

With the March quarter now filed away, locally the market will look to today’s April retail sales and trade balance numbers for direction. That sales result is nevertheless pre-May rate cut and pre-budget, so economists are primed for a soggy outcome.

Challenger ((CGF)) will hold an investor day and ANZ Bank ((ANZ)) do the same for its New Zealand business.

Rudi will appear on Sky Business twice today. At midday (noon-12.45pm) for Lunch Money and again between 7-8pm on Switzer TV.
 

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By Greg Peel

The Dow closed down 28 points or 0.2% while the S&P lost 0.1% to 2109 and the Nasdaq lost 0.1%.

Technicality

Last night the popular press explained yesterday’s crash on Bridge Street as being the result of the RBA not cutting rates. It’s a simple concept even the great unwashed might be able to grasp, but it’s also a complete load of rubbish.

At 2.29pm yesterday the ASX200 was down 80 points. That the index fell another 19 points to the close in what was a rolling 1.7% sell-off is a triviality. Indeed, there was a slight bounce at 2.30pm, but a short-lived one.

There was also a brief bounce at 11.00am, at a time the index was already down 63 points. This was sparked by the release of Australia’s March quarter current account numbers, including the terms of trade. These numbers came as a shock. A positive shock.

Australia’s trade surplus rose by 24% in the quarter, driven by a 5.8% increase in exports, thanks to a 6.9% fall in the Aussie dollar over the period, outpacing a 4.0% increase in imports. This trade balance will add 0.5 percentage points to the March quarter GDP, due out today. Prior to yesterday, economists forecast zero contribution from trade. Economists are typically conservative, measured types. You’ve never seen a bunch of guys and gals scramble so fast to revise their estimates as they did after yesterday’s current account release.

Previous consensus was for 0.5% quarter on quarter growth. Revisions now stretch up as far as 0.9%.

One might argue that these positive trade numbers will kill off any hopes of another RBA rate cut, and that’s why the 11am bounce for the ASX200 proved short-lived and the selling resumed in earnest once more. However the bottom line is that yesterday’s 99 point drubbing was technical. Whether or not you believe in the tea leaves, enough people do to make those tea leaves self-fulfilling. Tech analysts have been boring everyone for about a month with an unchanged mantra that if the ASX200 cannot hold over 5750, it must go down.

And so yesterday, it did.

Sector moves? Well, they matter not. Everything was creamed. It was technical.

Aussie Aussie Aussie

Last night the popular press explained yesterday’s surge in the Aussie dollar as being the result of the RBA not cutting rates. It’s a simple concept even the great unwashed might be able to grasp, but it’s also a complete load of rubbish.

Well…actually in this case there is an element of truth. The stock market was never going to specifically react to no rate cut because no one expected a rate cut. Forex cowboys nevertheless hail from another planet, so at 2.30pm yesterday the Aussie did spike up. But the Aussie had already spiked up at 11.00am on the release of those surprisingly positive trade numbers, which is what one might expect. Clearly the market was set short ahead of yesterday, so by the afternoon the short-covering scramble found another gear when the RBA stayed put.

It was not the fact that the RBA didn’t cut that caused the spike nonetheless, it was this line from Glenn Stevens accompanying policy statement:

“Information on economic and financial conditions to be received over the period ahead will inform the Board's assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”

And what information had we already received? A positive shock in the trade numbers.

Over 24 hours the Aussie is up a significant 2.2% to US$0.7777. It is not because the RBA didn’t cut yesterday. It is because today’s GDP release may come in better than previously expected, and that may yet kill off the possibility of rate cut anytime soon, and it’s because of Greece.

Capitulation?

The 2.2% gain in the Aussie to this morning has a lot to do with a 1.6% plunge overnight in the US dollar, to 95.93 on its index, which is all about a surge in the euro. I’ve noted recently the popular press have been trotting out Greece these past weeks an easy excuse for market movements when they really have nothing else to go by, but this time the Greece factor was indeed in play last night.

Last night Greece’s creditors – the IMF, European Commission and ECB – met to argue amongst themselves rather than argue further with the Greek government. That strategy has gotten them nowhere. The troika has persistently demanded Greece come up with an agenda of reforms, and Greece has persistently failed to do so, or at least has offered agendas the troika has abruptly dismissed.

So at wits’ end, last night the creditors decided to take matters into to their own hands and come up with an agreed agenda of reforms to give to Greece on a take it or leave it basis. If you want your money, they said, you’ll have to play it our way.

When Alex Tsipras heard this was what the meeting was all about, the Greek prime minister quickly drew up another version of his own reform agenda and thrust it at the creditors. Pure politics, of course; Tspiras must be seen by the people who elected him to be standing up to the troika and forcing its hand, not bowing meekly to its demands.

And so it goes on.

Last night’s meeting did suggest to the world the troika is prepared to do what it has to to try and keep Greece within the fold, at least within reasonable bounds. Throw in a stronger than expected flash estimate of eurozone May CPI, and the euro took off.

Wall Street Stalled

The Dow is struggling to break away, in either direction, from the 18,000 level at present. The S&P500 is similarly glued to 2100. Last night saw a mixed batch of news, and little in the way of direction.

US stock markets opened with the news factory orders had fallen short of expectations for the eighth month in nine. The indices opened to the low side, but by this stage the euro was rallying and the US dollar falling. This is good for exporters but also for the oil price, and so a turnaround rally ensued. Throw in announced record auto sales for the month of May, and the Dow did manage a 50 point gain at its peak.

But it’s jobs week, and no one wants to get too carried away. The Dow fell back to close down 28 points, balancing out the 29 points it closed up on Monday night.

Not so stagnant is the US bond market, which last night saw the ten-year yield jump 7 basis points to 2.27%. The sell-off in US bonds was triggered by a sell-off in German bonds, which was triggered by the news regarding Greece.

Commodities

As noted, the drop in the US dollar last night was enough to push up West Texas crude by US85c to US$61.06/bbl and Brent by US44c to US$65.38/bbl.

Action was more muted on the LME nonetheless, where traders are also cautious ahead of this week’ US jobs numbers. No base metal price moved more than 1%, and all moved in different directions.

Back from a break, iron ore is up US70c to US$62.10/t.

A 1.6% plunge in the greenback couldn’t excite gold traders, hence gold is up a mere US$4.40 to US$1193.00/oz.

Today

The SPI Overnight closed up 18 points or 0.3%. Bear in mind this time yesterday the SPI was up 17 points.

Australia’s GDP result is out today, and given all the downs and ups of lead-in component releases – construction, capex, trade – it’s become a bit of a guess and giggle.

Australia will also see a services sector PMI today, and HSBC will release its take on the Chinese services PMI. The rest of the world will follow tonight.

Tonight sees the ADP private sector jobs number is the US, and the latest Fed Beige Book.

Rudi will appear on Sky Business tonight, Market Moves, 5.30-6pm.
 

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By Greg Peel

The Dow closed up 121 points or 0.7% while the S&P gained 0.9% to 2123 as the Nasdaq added 1.5%.

Deconstructed

I suggested yesterday that given the fall on Wall Street on Tuesday night was largely driven by expectations a Fed rate rise is looming we would likely see yield stocks giving back some of their rebound gains in yesterday’s session, and that did come to pass. But it was a game played in two halves.

The initial response to Wall Street’s drop was not too severe and it was clear the bargain hunters were still out looking for value when the ASX200 was hanging at only 20-odd points down mid-morning, but the mood changed on the release of the Australian March quarter construction work done numbers, shifting the focus back to domestic issues.

The volume of construction fell in the quarter by 2.4% when economists had forecast a fall of 1.4%. Construction is down 8.8% year on year. No surprises that ongoing falls in mining investment are leading the numbers lower, but at 7.8% last quarter’s engineering volume reduction was greater than expected.

Hooray for residential construction which rose 4.8% and would be a cracker of a result on a standalone basis. But given non-residential managed only 1.0% growth and the public sector contributed a fall of 0.3%, housing alone is not enough to overcome the ebbing tide of mining construction. Overall resource sector construction is still being supported by the massive LNG projects underway in WA and Queensland but these are one by one reaching completion, and by 2017 will be adding to the general “mining investment” decline.

The bottom line is the rest of the Australian economy needs to pick up, beyond just housing, if the Australian economy is going to transition without too much pain. Federal infrastructure spending is set to pick up as is spending in the big non-mining states of NSW and Victoria, but the mining states are on a sharp path southward. That just leaves non-residential, meaning office blocks, shopping malls and industrial complexes, which are representative of the wider non-mining economy.

At this stage economists are forecasting next week’s GDP result to show 0.5-0.7% growth, having trimmed the numbers after yesterday’s data release. Today sees the all-important private sector capital expenditure numbers, which will add further colour.

By the end of the session all sectors finished in the red on the ASX bar tiny info tech, with resources, the banks, the supermarkets and the yield plays all giving up the ground regained on Monday.

Greek God

Greek prime minister Alexi Tsipras was door-stopped by media last night as he left another bail-out negotiation meeting and he announced to the world that the negotiations are in their “final stretch” and that a deal is imminent. He warned the Greek people that some might suggest otherwise, but that they should be relieved to know the deal would “guarantee security and stability for the Greek economy”, that there is “absolutely no danger for salaries or pensions, for banks or deposits” and indeed that the deal would be “positive for the Greek economy”.

Perhaps he didn’t have time to add that there will be peace and goodwill among all people, wealth and happiness for all, and that no Greek child will be living in poverty.

It took about two heartbeats after the door-stop for European Commission insiders to insist Greece is not on the brink of a deal and for Reuters to publish an official statement from the EC vice president that “we are still not there yet”.

But Pollyanna was happy to take the Greek prime minister’s word over the EC and hence the German DAX rose 1.3%, the French CAC rose 2.0% and the London FTSE rose 1.2%.

The exuberance then spilled over into Wall Street.

Rebound

Having fallen sharply on Tuesday night, Wall Street was primed for at least a small recovery last night but the Greek news seemed a good enough excuse to kick things on a little further and regain the bulk of Tuesday night’s losses.

That said, a good deal of the move could also be attributed to Apple, which announced it is developing a major new operating system initiative to rival Google Now, which apparently is something that allows your phone to run your life for you, and apparently worth a 1.9% rally in Apple shares. Given America’s biggest company is by far the biggest cap weighting in the Nasdaq, that index jumped 1.5% to hit a new all-time high last night.

Given Apple is a lesser weighting in the broader S&P 500 but still the biggest, that index jumped 0.9%. And given Apple is now in the Dow, but at an equal-weight price average, that average jumped 0.7%.

The Greek news also sparked a rebound in the euro, which might have meant a pullback in the US dollar index but for a drop in the yen. The minutes of the last BoJ policy meeting, released yesterday, indicated doubts amongst policy makers the Japanese economy would hit its growth and inflation targets.

The US dollar index is thus steady at 97.26 which means the Aussie is also this morning steady at US$0.7731. Gold is also steady at US$1187.80/oz.

Commodities

The stall in the rise of the US dollar last night translated into mostly small and mixed moves on the LME, albeit aluminium suffered technical selling in falling 1% and nickel rose 1%.

The iron ore recovery marches on, with the price up another US50c to US$62.60/t.

The oils have suffered this past couple of sessions on the stronger greenback but were still sold down again last night despite a steady currency. West Texas fell US71c to US$57.65/bbl to mark its lowest level this month while Brent fell US$1.68 to US$62.29/bbl.

Aside from forecasters assuming only a modest reduction in US weekly inventories, oil traders are looking ahead to the next OPEC meeting, scheduled for next week in Vienna. There is no expectation OPEC will waver from its chosen path of squeezing out excess US shale production but given oil prices have rebounded sharply from their lows, it is safer to square up.

Today

The SPI Overnight closed up 11 points or 0.2%.

As noted, local economists will be salivating ahead of today’s release of March quarter private sector capex and capex intentions numbers. The former represents a critical component of next week’s GDP result and the latter is one of the RBA’s most valued predictive indicators for growth in the coming year.

The US has been enjoying solid housing data releases this month and tonight brings pending home sales.

On the local stock front ALS Ltd ((ALQ)) will release earnings reports today.

Rudi will appear on Sky Business' Lunch Money at noon.
 

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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