By Greg Peel

The Dow closed up 112 points or 0.6% while the S&P rose 1.1% to 2066 as the Nasdaq jumped 1.7%.

Can’t buy it, can’t sell it

While the ASX200 keeps finding reasons of late not to push up sustainably beyond 5000 – perceived bank woes are a case in point most recently – it just doesn’t like being under 5000 for very long either. While it was a choppy session on Bridge Street yesterday as sellers and buyers battled it out, the buyers won out in the end without any real incentive to do so other than every time the index falls below 5000, it pretty soon recovers.

The energy sector was the exception yesterday, rising 3.2% because the oil price recovered from an initial fall on Tuesday night and closed slightly higher. Traders in oil stocks must by now have very stiff necks from whiplash as they stampede backwards and forwards on every one dollar move in the oil price, only to find themselves forever back where they started.

Beyond energy, there appeared to be some bargain hunting going on in the industrials, healthcare, materials and consumer discretionary stocks yesterday. The banks closed relatively steady, which at the moment is a good day for the banks, while telcos fell, having not fallen on Tuesday, and consumer staples saw minor selling.

Buyers of oil stocks will nevertheless be feeling chuffed this morning following another jump in oil prices overnight. The ASX200 closed 55 points shy of 5000 yesterday and will likely close some of that gap today. The overnight futures are calling 18 points up but then they were calling 18 points down yesterday morning, and we closed up 21. An outside bet on 5000 being recovered today is not a silly one.

Oil Shock

US crude inventories fell by 4.9m barrels last week. Analysts had predicted a 2.9m increase. I don’t ever recall analysts getting the weekly numbers spot on but this is a bit of boilover. For those who get a bit warm and fuzzy over stats, it is the biggest fall in crude inventories for this particular week of the year since 1997.

When WTI futures “closed” early in the afternoon, the benchmark oil price was up over 5%. The market doesn’t actually “close”, it simply switches to electronic trading and carries on non-stop from Monday morning to Saturday morning. A closing price is nevertheless marked for bookkeeping purposes. Since that mark WTI has come off a bit, to be up 3%.

The oil price rally pretty much turned around what had threatened to be a weak session. Wall Street was soggy on the open, in line with European trading which had been soggy for most of the day. After the shock fall in German manufacturing orders revealed on Tuesday night, last night saw German industrial production for February falling 0.5%. This actually wasn’t too bad a result given forecasts were for a 1.8% fall.

The minutes of the March Fed meeting were also scrutinised last night. While Yellen’s speech last week largely rendered these minutes redundant, what was interesting was a debate between FOMC members about whether April should see a rate rise. Those believing April is too soon apparently won out.

Now, Yellen has suggested that April remains “live”, meaning the Fed could still hike if it so decided, but then every meeting has to, by default, be deemed “live” or what’s the point holding it? What we saw in the minutes was a rather unusual discussion about the future rather than the moment, ie whether or not to raise in March, and despite Yellen’s speech implying even June is looking unlikely, the fact April can be taken off the table was at least enough incentive for traders to pile back into “risk” stocks last night.

The epitome of “risk” stocks are the US biotechs, and with risk you get “momentum” traders. So when biotechs began to move up last night, the bandwagon was jumped upon. That’s why the Nasdaq was up 1.7% when the Dow only managed 0.6%. The S&P split the difference.

It could just as easily completely reverse in a session or two. Yellen will speak again tomorrow morning Sydney time, after the close of Wall Street tonight.

So between oil and a “momo” rally, Wall Street had a positive session last night.

Commodities

We recall that producers within and without OPEC are planning to meet in Doha in a couple of weekends to discuss a production freeze. Last night the Kuwaiti oil minister expressed confidence that an agreement would be reached. This clown is probably cracking the champagne as we speak believing he managed to orchestrate a 5% oil price jump when all of OPEC knows a production freeze is complete fantasy.

Only supply curtailment in the US will move oil prices higher. Last night’s weekly US inventory drop is why oil prices are up.

West Texas is up US$1.21 or 3.3% at US$37.73/bbl and Brent is up US$1.47 or 3.8% at US$39.81/bbl.

Yet again there were mixed moves in base metals last night. No move exceeded one percent.

Iron ore fell US20c to US$53.80/t.

The US dollar index is down slightly to 94.50 but gold is also down US$8.90 at US$122.30/oz.

One presumes the 0.8% rally back for the Aussie overnight to US$0.7600 is oil-linked.

Today

The SPI Overnight closed up 18 points or 0.4%.

As noted, Yellen’s speech will begin after Wall Street closes tonight.

Before that, we’ll see the local construction PMI and Bank of Queensland ((BOQ)) will publish its first half result.

Rudi will make his weekly appearance on Sky Business, 12.30pm-2.30pm and re-appear again on Switzer TV between 7-8pm.
 

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By Greg Peel

The Dow closed down 133 points or 0.8% while the S&P lost 1.0% to 2045 and the Nasdaq fell 1.0%.

Market Worries

“The Australian dollar has appreciated somewhat recently. In part, this reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role. Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.”

This is the critical paragraph from yesterday’s RBA monetary policy statement, with the rest of the statement remaining little changed from previous months. Glenn Stevens has acknowledged that while stronger commodity prices are a welcome driver of a stronger currency, the “race to the bottom” among Australia’s trading partners has left the local currency sitting out like a shag on a rock through no fault of its own.

A weaker Aussie is important to aiding the transition away from dependence on mining investment in the Australian economy, hence recent strength is “complicating” the issue. This could be the first signal the RBA is prepared to act from an exogenous perspective, simply to bring Australia into line with the rest of the world. We note that even New Zealand has bowed.

The Aussie initially rallied on yesterday’s statement release because there was no rate cut – not that anyone was expecting one. Only then did the forex cowboys actually read the statement, and in so doing realise it was actually dovish. The Aussie is down 0.8% over 24 hours at US$0.7541 despite the US dollar being steady.

Yesterday was not a day, nevertheless, in which any hope of an imminent rate cut was going to make any difference to sentiment. The writing was on the wall at the close on Monday, when an attempt to rally above the 5000 mark failed. Markets that fail to go up tend to go down instead. And we’ve seen this movie all too often now – once we fall through 5000, we pretty quickly get down to 4900 or 4800, before returning.

Consumer discretionary is one sector that does not like a weaker currency, which may go some way to explaining that sector’s 2.1% fall yesterday. Although I’d suggest there was a delayed response to Monday’s weak retail sales data in play as well.

The banks don’t like lower rates, but there’s a lot more going on in the banking world at present than this concern alone. A 3.3% fall in the energy sector yesterday reflected a lower oil price, and for the banks this means an increased threat of default on energy sector loans. But we also had APRA releasing its discussion paper on Net Stable Funding Ratios on Monday, which by yesterday had bank analysts suggesting the majors will need to raise billions more in debt funding in order to comply. Throw in APRA’s warning that the current lending scene is beginning to look a lot like 2007, and there’s plenty of reason the banks were down 1.4% yesterday.

Including ASIC’s accusation Westpac has been rigging the bank bill swap rate settlement.

Despite an unchanged iron ore price overnight and mixed metal price movements, the materials sector fell 1.5% yesterday. Perhaps the ongoing insistence of analysts that the recent commodity price rally has no substance on a supply-demand basis is weighing. Or perhaps yesterday was just another day to sell everything. Only the telcos came out almost unscathed.

Not helping the mood was the release of Australia’s service sector PMI. It fell into contraction in March at 49.5, down from 51.8 in February. The service sector is the Australian economy’s underlying growth engine. The services PMI result is in stark contrast to the manufacturing PMI which is showing frenetic expansion, but the service sector is many multiples larger than the manufacturing sector in this country.

Around the Grounds

Which is not the case in Germany. If it wasn’t bad enough last night that the eurozone’s services PMI disappointingly fell to 53.1 from 53.3, data showing a 1.2% fall in German manufacturing orders when a 0.2% gain was expected caused ripples across the continent.  The German stock index fell 2.6% last night, while France chimed in with a 2.2% fall and the UK 1.1%.

The UK services PMI showed a gain to 53.7 from 52.7 while Japan again disappointed with a drop to 50.0 from 51.2. The winner on the night was the US, which posted a welcome return to expansion with a rise to 51.8 from 49.5.

IMF chief Christine Lagarde last night warned that global growth was slowing. The IMF has a habit of telling everyone what they already knew some six months after they originally knew it. Lagarde also suggested that while fiscal policy needs to play its part, negative interest rates represent “net positives” for the global economy. This is not an opinion held by the majority of the market.

The impact of Lagarde’s comments was a fall in the German ten-year bond rate to 0.10%, dragging the US equivalent down 5 basis points to 1.73%. There is  now talk of the German rate going to zero or lower, and the US rate thus testing GFC lows of 1.3%.

Healthy Pullback?

Oil prices opened lower last night, which, combined with the weak data out of Germany and Lagarde’s warning ensured a weak open on Wall Street. Tax policy was also in play, with Pfizer pulling out of a multi-billion dollar bid for global peer Allergen now the US government has clamped down on the practice of tax “inversion” – acquiring an offshore based company in a lower company tax regime and shifting headquarters.

Wall Street now anticipates more such takeover bids will be abandoned and takeover premiums will evaporate. Interestingly it was another session in which Wall Street ultimately ignored the oil price. WTI had already begun to bottom out and turn around when news came through of an explosion at an Iraqi oil well. Oil prices closed higher on the session but the selling in US stocks accelerated towards the bell.

The stronger service sector PMI was lost in the wash. Like Australia, the US service sector is much bigger than the manufacturing sector.

Last night’s weakness did not seem to bother too many traders, however, a lot of whom have been expecting a pullback following the sharp rebound from the February lows. Arguably Wall Street is consolidated back to a more measured platform from which to assess earnings results, which start to flow next week.

Commodities

West Texas crude is up US$1.06 or 3% at US$36.52/bbl while Brent is up US83c or 2.2% at US$38.34.

Yet another mixed night of trading on the LME saw copper and lead steady, aluminium down 1%, tin down 1.5% and zinc down 2%, while nickel rose 1%. If these ongoing ups and downs were consistent across the base metals then fair enough, but the reality is each metal is more often going up one night and down the next.

Iron ore remains unchanged at US$54.00/t.

Gold has jumped US$15.90 to US$1231.20/oz. It’s nothing to do with the US dollar index, which is steady at 94.63. It no doubt has a lot to do with the head of the IMF being keen on negative cash rates.

Today

The local energy sector should in theory find support today from a bounce in the oil price. Otherwise the SPI Overnight closed down 18 points or 0.4%.

Caixin will publish its China service sector PMI today, not yesterday as I erroneously assumed, because of the holiday in China on Monday. Renewed focus on the strength or lack thereof of the European economy will centre on German industrial production numbers.

The minutes of the last Fed meeting will be published tonight but they have already been superseded by the Fed chair herself, and Yellen will speak again tomorrow night.
 

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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