The Overnight Report: Three Times A Lady

Daily Market Reports | Mar 16 2017

By Greg Peel

The Dow closed up 112 points or 0.5% while the S&P rose 0.8% to 2385 and the Nasdaq gained 0.7%.

Wild Ride

For a session ahead of a Fed meeting, even one in which the outcome was assumed to be known, yesterday’s trade on the local market was pretty wild. The ASX200 was down -32 points at lunchtime and closed up 15.

I suggested yesterday investors were this week repositioning ahead of the Fed, taking advantage of the sell-off in the miners to buy in at cheaper levels while at the same time readdressing yield stocks that have been beaten down on Fed rate hike expectations.

It was interesting to see the the same play out again yesterday, with clearly a lot of indecision and argy-bargy going on before the dust settled on the positions traders were willing to take into the Fed meeting.

The sector mover on the day was utilities, rising 1.3%. That is not a move you’d expect ahead of a chance of a hike in US rates. But the point has been for the last week or more that a hike is baked in – all that matters is just how many more the Fed might signal for 2017. It had been three, could it go to four? Wall Street appeared to be fearing this may be the case. Was this just over-excitement?

A 1.3% move up in utilities, backed up by a 0.5% gain for telcos, suggests local investors believed this to be so. It would seem incongruous, surely, for the switch so suddenly from the “gradual” talk of 2016, the “running the economy hot” suggestion late in the year, and the “we have to wait and see what happens fiscally” call of the last Fed meeting. Four hikes? Probably not.

Clever.

Still Gradual

The Fed lifted its funds rate last night by 25 basis points to 0.75-1.00%. Fed chair Janet Yellen signalled that the FOMC is still targeting three rate hikes in 2017, meaning two more for the year.

"Our decision to make another gradual reduction in the amount of policy accommodation reflects the economy's continued progress," she told reporters. "Today's decision is in line with that view, and does not represent a reassessment."

Of course, the Fed’s position remains fluid. Three rate hikes were touted for 2015 and we got one. Three were touted for 2016 and we got one. Three were touted for 2017 and no one expected the first would be as early as March, but we’ve got it. The market then assumed it would mean four in 2017, but the Fed is still pressing for three.

There remains no development on the Trump policy front beyond intention or at best, desire. Healthcare restructuring looks set to be bogged down in Congress for months. That would push tax reform and deregulation – what the market is really looking for — to the latter half of the year. The Fed had to move once to risk falling behind the curve. Three hikes in 2017 makes sense if we assume nothing now until later in the year, maybe September and December, when perhaps there is more clarity with regard stimulatory fiscal policy.

In terms of behind the curve, last night’s data showed the US headline CPI rising 0.1% in February, as expected. It’s only a small gain, but headline inflation is now running at 2.7% annually. Core inflation is running at 2.2%. The Fed’s target is 2%.

So how did the markets, which had clearly been set for a four hike scenario, respond?

The S&P500 rallied 0.8% despite a drag from weakness in the banks. Banks like higher rates.

The US ten-year bond yield fell -9 basis points to 2.51%.

The US dollar index tanked -1.2%. Incidentally, exit polls from the Dutch election showing the nationalist movement is about as popular as Pauline Hanson in WA also helped push the euro higher against the greenback.

Gold has rebounded US$21.90.

West Texas crude has rebounded 2%.

Iron ore has jumped 4%. Base metal prices are modestly stronger, except for nickel, but LME trading closes just as the Fed statement is released so we really need to wait until tonight to see a full response in London.

In short, everybody’s happy. Stocks are up, bonds are up, commodities are up, gold’s up and the drag of a too strong greenback has been tempered.

Go Janet.

So what now? The US stock indices remain just shy of their all-time highs. The Fed race has been run and won for the time being and it doesn’t look like there’ll be much to get excited about out of the White House for a while yet. The French election looms, but if the Dutch election shows a swing away from a feared nationalist resurgence, then Frexit fears will also now be tempered.

Good Lord. We might be forced to simply concentrate on corporate earnings and economic data!

Commodities

West Texas crude is up US93c to US$48.91/bbl.

Copper rose 0.5% in London, lead 1%, aluminium 1.5% and zinc 2%. Nickel was slightly weaker.

Iron ore rose US$3.70 to US$92.10/t.

The US dollar index is down -1.2% at 100.53. Gold is up US$21.90 at US$1219.80.

The greenback is down -1.2% and commodity prices are stronger. How does that affect the Aussie? It’s up a whopping 2% at US$0.7711.

Today

The SPI Overnight closed up 36 points or 0.6%. That puts 5800 back in the sights for the ASX200.

Those traders buying up both mining stocks and yield stocks these past couple of days will be feeling rather smug this morning.

The Bank of Japan will hold its policy meeting today and the Bank of England tonight, in the wake of the final parliamentary approval for the triggering of Brexit.

The local jobs numbers are out today. Forex traders and politicians may pay attention but otherwise they won’t mean much.

Myer ((MYR)) will release its earnings result today.

Rudi will travel to Macquarie Park to appear on Sky Business, starting at noon (not 12.30pm) until 2pm today.
 

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