The Overnight Report: Let’s Get Stimulated

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By Greg Peel

The Dow closed up 39 points or 0.2% while the S&P rose 0.5% to 2032 and the Nasdaq added 0.3%.

And lo, Bridge Street looked at the prospect of increased global monetary stimulus and saw that it was good, yesterday sending the local market off to the races in what appears a slightly delayed reaction to stock market strength elsewhere. The US and Germany are cases in point.

The two sectors leading the charge yesterday were materials and supermarkets, both posting 2.3% gains, while 1.8% gains for both industrials and utilities further emphasised the fact yesterday’s 1.6% gain for the ASX200 was an across-the-board affair. BHP Billiton ((BHP)) set the tone in posting a solid quarterly production report, and further pleased the market by announcing a planned reduction in rig count for its US oil operations in light of the lower oil price climate. But yesterday was not about picking a bottom in energy stocks, as on a gain of 0.5%, the energy sector was the underperformer on the day.

Yesterday was more about interest rate cuts and money printing. Westpac’s monthly consumer confidence survey for January showed a slight bounce in sentiment, but not nearly enough to offset the worrying plunge in December. The result strengthened the Westpac economists’ belief the RBA will be forced to cut its cash rate next month, while those less dovish nevertheless see March as the likely timing. Cash rates are being cut across the globe in response to disinflation – a lingering product of the GFC and debt deleveraging but most recently the other edge of the sword of plunging oil prices.

On that note, yesterday the Bank of Japan did not increase its 80trn yen per year monetary stimulus program, surprising no one, but the central bank did lower its inflation forecast for the Japanese fiscal year 2015 (April- March) to 1.0% from a previous 1.7%. As far as markets are concerned, this cut opens the door for further BoJ stimulus if so desired.

The BoJ may well be forced to go again if the ECB comes to the party tonight, as is assumed. Global markets have set themselves for some real action from Mario Draghi this time (as yesterday’s Bridge Street move attests) after months of rhetoric, which may lead to some pretty wild volatility if he fails to deliver. Yet last night rumours spread that the ECB will announce an E50bn per month bond buying program, and that’s right on the money of market expectation. The suggestion is this is a deliberate leak to avoid too much dangerous volatility on the announcement tonight. See: Swiss franc.

Last night the Bank of Canada cut its cash rate by 25 basis points to 0.75%. The major energy exporter is suffering. Over to you Glenn. Whether or not the RBA really wants to cut, Australia is rapidly becoming the shag on the rock in terms of relative global monetary policy. Even the RBNZ has pulled stumps on its tightening program. The Aussie is stuck above 80, and will not meaningfully fall unless the RBA joins the race-to-the bottom global monetary policy party.

Wall Street was up, down and all around yet again last night, before posting another relatively tepid close Dow-wise, albeit the broad market S&P500 posted a more solid gain. The Dow has moved in a 200-plus point range every session in 2015 to date, with many sessions ending fairly flat. US housing starts rose a better than expected 4.4% in December, it was revealed last night, to mark a six and a half year high for single family home starts. But that’s not important right now. And similarly, the US earnings season is being largely overlooked.

What’s important is the ECB, and on that note the US ten-year yield jumped 4 basis points to 1.85% last night. Gold is steady at US$1293.20/oz. The US dollar index is off 0.1% to 92.92 but the Aussie is down 0.9% to US$0.8097 as the pressure builds on the RBA.

Base metal prices were again mostly stronger last night, with nickel’s 2% gain the stand-out. Iron ore fell US90c to US$66.50/t just to show all is not so rosy. And announcements of cuts in rig counts not just from BHP but from many oil producers operating in the US are beginning to encourage thoughts of a bottom now forming for the crude price. Oil markets are still wary though, last night sending West Texas up US88c to US$47.56/bbl and Brent up US74c to US$48.95/bbl.

Despite yesterday’s big move in the ASX200, futures traders remain enthusiastic. The SPI Overnight is up 39 points or 0.7%.

Mario Draghi is currently listening to Rod Stewart on his iPod:  Tonight’s the night…
 

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