The Overnight Report: Over To You Janet

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By Greg Peel

The Dow closed down 30 points or 0.2% while the S&P fell a point to 2002 and the Nasdaq rose 0.3%.

The local market was surprisingly strong yesterday for a session without a lead-in from Wall Street, and a supposed escalation in tensions in the Ukraine. Trading was domestically focused, incorporating news of the end of the mining tax, a June quarter current account deficit that came in as expected, and no change in policy from the RBA.

Australia’s trade deficit came in at $13.7bn compared to expectations of $14bn, up from $7.8bn in the March quarter. The terms of trade in goods and services fell 4.1%, representing recent falls in commodity prices, particularly iron ore.

While no one expected a rate change yesterday, it’s difficult to determine now what the market is expecting ahead. The lower terms of trade in theory provides more room for the RBA to cut again, thus alleviating pressure on the currency, which is why the Aussie is down 0.6% to US$0.9276. But there was very little in the RBA statement to suggest this might occur.

The central bank acknowledged the moving parts in its statement yesterday – improving business conditions, a recovery in household sentiment, a “significant” decline in mining capex, “moderate” capex growth elsewhere, subdued public spending, an increase in the unemployment rate, increasing house prices, and that still-high Aussie. Put it all together, and there is no obvious reason to shift policy in either direction.

It’s a different story on Wall Street, where last night the theme was very much one of interest rate increase expectations being heightened.

The bulk of the market returned from their summer holidays last night to meet a US manufacturing PMI that showed a jump to a rapid-paced 59.0 in August from 57.1 in July against economist expectations of 56.1. It’s the fastest rate of expansion since March 2011.

On the other side of the world, sanctions are likely to be stepped up against Russia, thus impacting on the European economy, and the Japanese economy is yet to show any meaningful signs of rebound out of its tax hike-induced malaise. The Bank of Japan and ECB both meet on Thursday.

On the energy front, slower growth in the wider global economy, including China, and shipments of crude oil from Kurdish Iraq which are looking for a buyer, are cancelling out any concern over geopolitical supply shocks. Never mind that Libya has again fallen into anarchy.

The result of all of the above is a US dollar index that is 0.2% higher at 82.98 and showing a distinct upward trend. Oil prices crashed last night, with Brent falling US$2.30 to US$100.34/bbl and West Texas falling US$2.48 to US$93.26/bbl. Lower oil prices provide a boost to economic growth, particularly with regard the US consumer, while at the same time keeping inflation at bay.

Thus from the US perspective, last night’s session highlighted a US economy that is showing increasing relative strength, vis a vis the rest of the world, without clear inflation pressure. If that is not a formula for pressure on monetary policy, it’s difficult to see what might be. Gold thus fell US$21.60 to US$1265.40/oz and the US ten-year bond yield leapt up 8 basis points to 2.42%.

The read-through to the US stock market is more nuanced. Lower energy prices are a big plus, aside from the impact on the large-cap energy sector. Wall Street has not quite sorted out whether it wants to sell on any hint of a Fed rate rise, given the negative impact on monetary stimulus, or buy on any hint, given the implications of a strong US economy. The US stock market is at all-time highs, fuelled, to this point, mostly by QE. The global geopolitical landscape is uncertain.

As it was, with all market players supposedly back in the game last night, the US indices rocked and rolled their way to the close last night. At one point the Dow was down 88 before closing down 30, while the Nasdaq closed with a 0.4% gain and the S&P held firm around that 200 mark.

Meanwhile in London, nickel was the only base metal to post a move of any significance in falling 1%. But in Shanghai, the iron ore price is down another US40c to US$86.70/t, matching the 2012 low.

The SPI Overnight closed up 3 points.

The June quarter GDP is out today, with consensus suggesting 0.6% quarter on quarter growth for an annualised 3.2%. It’s service sector PMI day today around the globe, except for the US which is running a day behind this month.

Watch out for BHP Billiton ((BHP)) going ex-div today, among others.
 

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