By Greg Peel

The Dow closed up 13 points while the S&P lost a point to 2127 and the Nasdaq fell 0.2%.

Don’t Panic

“Members agreed that, as at the time of the reduction in the cash rate in February, the statement communicating the decision would not contain any guidance on the future path of monetary policy. Members did not see this as limiting the Board's scope for any action that might be appropriate at future meetings.”

And with this statement in the minutes of the RBA’s May policy meeting we can finally put to bed the notion the central bank has ended its easing cycle. Most of the angst on the release of the May policy statement was based on the omission of the line “The Board will further assess the case for such action at forthcoming meetings”. This line appeared in April, and in March, but not, as the May minutes rightly point out, in February, when the RBA previously cut its rate.

Seems the market missed that one. And it makes sense – cut the rate, then wait to see what happens before signalling further action. Now we can all get some sleep.

Not that the minutes provided any great comfort on Bridge Street yesterday. We fell back in early May when the market thought perhaps the RBA had finished cutting, but we have not recovered on the knowledge that is not necessarily the case. Other factors are at work, and to some degree these are technical. On a failure to regain 5750, the ASX200 would be destined to return to 5600 or lower, so the tea leaves suggested.

Technical influence was evident yesterday when the SPI Overnight signalled a 22 point rally on open and the physical proceeded to fall 40 points. The fundamentalists pushed the index back to the flatline late in the morning but the selling pressure quickly returned. There were falls in energy and materials given lower commodity prices and, in the case of materials, the great Twiggy tanty. But the big losers on the day were the supermarkets (consumer staples), down 1.9%.

Consumer staples has proven the most volatile of all sectors in May, belying the sector’s natural state of being as a cash flow defensive.

The Aussie dollar dipped a little on the release of the RBA minutes yesterday but given both the RBA’s Statement on Monetary Policy and a speech delivered by the deputy governor had already put the kybosh on end-of-cycle fears, the reason the Aussie is down 0.9% to US$0.7916 over 24 hours is because the US dollar index is up another 1.2% to 95.30.

Mario Rushes In

The US dollar index is up because the euro is down. The pullback in the US dollar from its prior peak lends itself as much to signs of improvement in the eurozone economy as it does to assumptions the Fed will hold off for longer. The euro has been a little wobbly of late given all the talk over Greece being destitute, and on Friday night it started to tip over, sending the US dollar up a percent.

Last night it really crashed, posting its biggest session fall in two months, and sending the greenback up another percent. It was not about Greece this time however, it was about the ECB.

Mario Draghi is worried that in the northern summer, European treasury officials and bond market traders all go off to lie on some pebbles and bond markets become decidedly summer-thin. The ECB is implementing a massive bond purchase plan (QE) and were monthly purchases to be consistent, the risk is the central bank would steamroller through a lack of supply in the July-August period. So while there will be no alteration, at this stage, to the total size of the intended QE package, the ECB will step up its monthly bond purchases in May and June before the markets all go quiet.

That was enough to set the euro off. Granted, the eurozone April CPI, released last night, came in at a lower than expected 0.0% at the headline, the zone’s March trade balance missed expectations, and the ZEW investor sentiment survey for May came in weaker than forecast.

But what Draghi probably wasn’t thinking about at the time is the unintended flow-through consequences of his seemingly sensible announcement. Euro down, US dollar up, and dollar-denominated commodities taken to the cleaners.

Commodity Crunch

Thanks Mario, they said on the LME, as aluminium and lead fell 1%, copper and zinc 2% and nickel a whopping 5.5%.

Iron ore posted its sixth consecutive decline with a fall of US60c to US$58.40/t.

West Texas crude fell US$2.34 or 3.9% to US$57.26/bbl. Brent fell US$1.90 or 2.9% to US$64.37/bbl.

Gold fell US$17.70 to US$1208.00/oz. Silver, which has been on a tear of late, fell 3.5%.

Wall Street Angst

Admittedly the US dollar was also supported last night by news US housing starts leapt 20.2% in April to mark the highest pace of construction since 2007. While clearly the result represented a rebound out of the snowbound March quarter, it still blew away forecasts.

But is this good news or bad, vis a vis Fed policy? No one’s quite sure anymore. The Dow initially rose around 50 points but could not hold on, dragged down, as it was, by the energy sector in particular on lower commodity prices.

Normally we’d look to the US bond market to provide a clearer signal of market perception, unlike that madhouse of a stock market, but unfortunately the US bond market has become its own madhouse of late. The US ten-year yield jumped 9 basis points to 2.24%, which is actually what it should do if it fears a Fed rate rise, but such persistent volatility is rarely seen in a market which is something like six times the size of the US stock market.

As it was, the Dow closed just over the line of another all-time high, but new ATHs have ceased to become cork-popping accomplishments in 2015. There is a lot of concern valuations are stretched ahead of said Fed rate rise, and that we still haven’t seen that 10% correction everyone said was long overdue two years ago.

Today

Unlike the Australian market, which is now down 6.3% from its April (post-GFC) high, and counting. The SPI Overnight closed up 2 points but this seems ambitious given the extent of commodity price falls overnight, the general sogginess that seems to have set in at the moment, and the fact the tea leaf readers called a move to 5500 if 5750 was not breached.

Westpac will release its monthly consumer confidence survey today – the first assessment post rate cut and post budget.

Japan will release its March quarter GDP result.

The minutes of the Fed meeting will be released tonight and as usual, will be pored over. However that meeting was back in April, so the value of those minutes is somewhat diminished.

On the local stock front, APN News & Media ((APN)), Boral ((BLD)), Graincorp ((GNC)) and Wesfarmers ((WES)) will all hold investor/strategy days today while Iluka Resources ((ILU)) is among those companies holding AGMs.
 

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By Greg Peel

The Dow rose 191 points or 1.1% while the S&P gained 1.1% to 2121 and the Nasdaq added 1.4%.

And down again…

Wednesday’s budget party quickly turned into yesterday’s hangover as the ASX200 gave back everything it had gained on Wednesday and more by lunchtime, before finding some stability towards the close. Initial excitement waned as one by one, economists pointed out that the glossy shine on Joe’s second attempt actually hides the fact it is still a fiscally contractionary offering.

Or maybe everyone cottoned on to the fact that if the budget brings a spree in iPad sales, the major beneficiary will be Apple, which doesn’t even pay tax here.

The consumer sectors did actually hold up yesterday to finish slightly in the green again, despite a net weaker index. Remember how I noted yesterday everyone seemed to miss the Chinese data in the budget haze? Well yesterday the materials sector led the market down with a 1.2% fall. There was also an outlier at play, with ResMed’s ((RMD)) heart attack dragging down the healthcare sector by 1.2%.

Perhaps the good news yesterday is that we did see a modicum of sanity return to the Aussie dollar, as buying eased off and the currency began to fall back from threatening 82c. Seems like only the other day we were looking at 75c, and we’ve had a rate cut in between. It’s mostly to do with the US dollar part of the equation nonetheless, but despite the US dollar index being down 0.3% to 93.36 last night, the Aussie is still down 0.4% over 24 hours to US$0.8080.

Still Super Mario

It was Ascension Day in Europe, which must be why the German DAX rose 1.8% in thin holiday trade. Or it might have been because Mario Draghi, in a speech he was delivering, reaffirmed his commitment to ECB QE for as long as it takes to put the eurozone economy back on a stable footing.

Whether or not that will include a contribution from Greece is yet to be determined. Last night the Greek finance minister suggested at a conference that Greece’s debt repayment obligations to the ECB should be pushed into “the distant future”. No doubt that went down well.

Aside from strength in European stocks, Draghi’s speech also sparked some lost strength in European bonds, and for once yields fell back. This was not lost on US bond markets.

Record Territory

Last night’s release of the US producer price index for April showed a 0.4% decline following a 0.2% gain in March, against economists forecasts of a flat result. The headline PPI has fallen in seven of the past nine months.

This provides heart to those hoping the Fed won’t raise its rates too soon, and was also the reason the US dollar index was again lower. But the headline number is not what the Fed is watching. The headline PPI showed a 1.3% year on year decline in April but the core PPI showed a 0.7% gain. The difference is, of course, the oil price. Still, 0.7% is hardly suggestive of runaway inflation.

So why did Wall Street suddenly take off last night?

Primarily it was because the mischievous bond market actually decided to behave itself last night. The US ten-year yield fell 4 basis points to 2.24% on the back of the PPI as well it should, and stayed there, rather than jumping back up 10 bips as it has been wont to do recently.

The debate still rages over why US bonds have suddenly been sold off when a Fed rate rise is not yet looming on the horizon. Oversupply of corporate issues meeting lack of buyers of government paper, technical breaches, moves in Europe, overbought “bubble” giving way – all of these factors have been argued and likely all have been conspiring together. What everyone does agree on is it has had nothing to do with fundamentals, and that has made US stock markets nervous. So last night, confidence returned.

The close of 2121 for the S&P500 not only marks another new record high, technical analysts suggest a close above 2020 represents a break-out of what has been a fairly entrenched 2015 year to date range. We shall see. Meanwhile, the Dow is still short of its all-time high, albeit by only 0.2%. But it you want to talk tea leaves, technicians will point out that the Dow Transports average is actually trading at a 2015 low. Dow Theory dictates that any new leg in the bull market requires both the Dow Industrial and Transport averages to be firing.

Of course with bond rates so low and the market overcrowded, many attribute Wall Street strength simply to the TINA trade – there is no alternative, if you want to see any return on your investment. One wonders how Tina might respond when the Fed finally hikes.

Just a dream?

The tip-over in the recovered iron ore price continued last night with an accelerated US80c fall to US$61.20/t. It is fair to say most observers have been expecting consolidation following the sharp rebound, but it doesn’t mean mining investors won’t become nervous again. Until iron ore can move more emphatically into the sixties, many smaller miners are still burning cash.

The falling US dollar is still failing to fire up base metal prices, as LME traders continue to worry about Wednesday’s weak Chinese data. Trading was thin last night with most of Europe celebrating Ascension Day, allowing lead to fall 3% and aluminium, nickel and zinc to all fall around 1%.

The oils had a quieter session as well, with West Texas falling US43c to once again be back under 60, at US$59.70/bbl, while Brent ticked up US18c to US$66.59/bbl.

Gold added another US$6.00 to US$1221.10/oz. Could gold, too, be breaking out? Best to see some further proof, one might suggest.

Today

So does the yo-yo go up again today? The SPI Overnight closed up 36 points or 0.6%.

The banks will be initially handicapped by National Bank ((NAB)) going ex-div. Oil Search ((OSH)) is among those holding an AGM today while it appears Paladin Energy ((PDN)) will provide its quarterly result today and not yesterday, as calendars had assumed.
 

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By Greg Peel

The Dow closed down 36 points or 0.2% while the S&P lost 0.3% to 2099 and the Nasdaq fell 0.4%.

As You Were

Well so much for having a “quiet” session ahead of the budget. Yesterday’s 0.9% rally was driven by another jump in iron ore prices and further announced cost cuts from BHP Billiton ((BHP)), sending the materials sector up 1.7%, a positive investor day presentation from Qantas ((QAN)), which helped industrials up 1.0%, and sudden renewed buying in yield stocks, for reasons that are not apparent.

The banks managed a 0.8% gain despite a 1.9% fall in a reopened National Bank ((NAB)), adjusting for the capital raising but liking it nonetheless, while the telco came back 0.9% and the supermarkets, which were trounced on Monday, rebounded 1.4%.

Perhaps Joe’s economic growth forecasts were leaked. By Disneyland.

Budgets tend to have little impact on the stock market other than briefly, unless there is a big change in policy impacting on a particular sector or company. There was nothing announced last night that’s going to move the general market dial.

The bad news is that the Aussie spent all night rallying, perhaps because one could almost call last night’s budget stimulatory, thus moving in concert with monetary policy, as opposed to last year’s disaster that intended to tighten fiscal policy in opposition to the RBA’s efforts. But the US dollar index is also down 0.5% to 94.57, helping the Aussie up 1.1% to US$0.7976.

Buddy can you spare a dime?

Joe might have been railing last night that Australia’s government debt costs about a hundred million a day in interest payments, thanks to the other mob yada yada yada, but spare a thought for Greece. According to reports, Monday night’s last minute E750m payment to the IMF has left a total of E90m in the bank. That’s it.

If Greece does not receive the next tranche of its bail-out package pretty much immediately it will go under, default, and possibly exit, either by walking out the eurozone door or being thrown out. The Greek government has indicated it wants to stay in, but has refused to bow to its creditors’ austerity demands.

And so it goes on.

The newly re-elected UK chancellor was over in Brussels last night talking tough on Greece and on the EU in general, warning that the Tory’s intended referendum on remaining in the EU will go ahead unless reforms can be made. So we may yet see a Grexit from the eurozone or a Brexit from the EU, or both.

Bond Panic

Historically low interest rates across the globe have led to a huge surge in corporate bond issuance as companies exploit once in a lifetime cheap funding, often only to buy back their own equity. But there is only so much corporate debt the market can take on before the boat threatens to sink. While Greek fears linger, sending the German DAX down 1.7% last night, a wider sense of timid optimism with regard the eurozone economy is bringing in question just why German bonds need to be as cheap as they are.

Which is why German yields have been rapidly rebounding the past couple of weeks, as investors rush to sell. The impact has flowed across the pond, where a break of technical levels has sent the US ten-year yield surging back as well. Last night the US yield leapt to a six-month high 2.36% early in the session before settling all the way back to 2.26%, down one basis point on the day.

The flighty bond market is giving Wall Street the willies, which is why the Dow was down 180 points last night as bond yields hit their intraday peaks. As yields settled back, so did the stock indices rise back once more to a less intimidating close. All was forgiven, but it does beg the question of what will actually happen when the Fed finally does raise its cash rate.

Well Oiled

Last night the US Energy Information Administration forecast that output from seven major US shale players will fall by 86,000 barrels per day in June. Throw in analyst expectations that tonight’s weekly US crude inventory numbers will see another drop, and renewed air strikes in Yemen, and West Texas crude jumped US$2.03 to US$61.27/bbl and Brent jumped US$2.41 to US$67.47/bbl.

The weaker greenback also helped commodity prices higher, particularly on the LME. Base metal traders were also squaring up in case today’s raft of Chinese data indicate Beijing’s earlier stimulus measures are beginning to gain some traction. All metals were stronger, including 2% gains for lead and zinc.

The iron ore price has slipped a tad, down US20c to US$62.30/t.

The weaker greenback also kicked gold up US$9.30 to US$1193.00/oz.

Today

The SPI Overnight closed down 16 points or 0.3%.

The aforementioned Chinese data include April industrial production, retail sales and fixed asset investment numbers.

Locally, the March quarter wage price index release will provide indication as to whether the RBA has anything to worry about on the inflation front.

The eurozone will release its first estimate of March quarter GDP tonight. In the US, retail sales will be in focus.

On the local stock front, Westpac ((WBC)) will go ex-div today, handicapping the index from the open.

Rudi will appear, as a guest, on Sky Business' Market Moves today, 5.30-6pm and then as host on Your Money, Your Call Equities, 8-9pm.
 

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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