The Overnight Report: September Still Open

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By Greg Peel

The Dow closed up 121 points or 0.7% while the S&P gained 0.7% to 2108 and the Nasdaq added 0.4%.

Cyclical

The Shanghai stock index closed up 3.5% yesterday, which is about all anyone cares about right at this moment. The fact the Chinese market didn’t turn tail again meant the Australian market could lock in the commodity price gains enjoyed on Tuesday night.

The materials sector thus led Bridge Street higher yesterday, with a 1.5% increase, but across the index it was a session notable for a return to favour for the cyclical sectors – those sectors more closely aligned to the outlook for the Australian and global economies and less concerned with defensive yield.

We saw a 0.9% gain for industrials, which has been a very quiet sector of late. Consumer discretionary also saw a 0.9% gain and healthcare, which has become more of an industrial than a defensive in recent times, jumped 1.2%. By contrast, the banks were less excitable on a 0.5% gain, ditto the telco on 0.4%, and utilities were flat.

Perhaps most importantly yesterday’s 0.7% gain took the ASX200 firmly back over the 5600 level, which most recently has been somewhat of an inflection level between sub-5500, where the buyers tend to come in, and sur-5700, when the sellers arrive. If the index can push over 5650, and the SPI futures are suggesting so this morning, the technicals are looking good for another run to the highs.

Door Open

A lot may depend, nevertheless, on Fed policy. All year the pundits have been warning that the first Fed rate hike will likely trigger a period of volatility – meaning a sell-off – although stability should return fairly quickly. It may even prompt the long awaited 10% correction in the US, which in turn would impact on the Australian market.

I suggest we’re long past that concept now.

2015 is shaping up to be a carbon copy, in respect of Fed policy, of 2013. In 2013, discussion began over just when the Fed might begin to taper its QE program. This led, initially, to a “taper tantrum” that saw US stocks slammed for a while. Chicken Littles were in abundance, warning the end will come the day the Fed starts tapering.

But as the debate dragged tediously on, everyone got used to the idea. The reality was, of course, that if the Fed decided it was time to start winding back the stimulus then the US economy must be improving. On the day in December when the Fed finally did announce it would start tapering, the Dow rallied 200 points. The Chicken Littles were battered and fried.

Here we are in 2015, and we can simply substitute “rate rise” for “taper”. Early in the year, every hint the Fed might be considering a rate rise, every positive US economic data release, prompted sharp selling. Weak economic data were heartily cheered. If back in April the Fed hinted the door was open for a rate rise in June, the US stock market would have had apoplexy. Last night, when the Fed policy clearly left the door open for a September lift off, the Dow rallied over a hundred points.

What last night’s statement didn’t say, or imply, is “we will not raise in September”. Nor did it say, or specifically imply, “we will”. There was nevertheless one word that caught everyone’s attention. The last few statements have suggested that a rate rise still required improvement in jobs growth. Last night the statement said “some” improvement. Wall Street took that to mean “we’re nearly there”.

So if the August and September non-farm payroll numbers continue the current positive trend, and there is no further weakening in US inflation (low commodity prices are an issue here), a rate rise announcement is a good bet for September 17.

And let us not forget the Fed has been at pains to suggest markets stop worrying about when the first rate rise will be, and take comfort in the fact it will be incremental, and that the pace of the tightening cycle will be very gradual.

Bring it on.

Commodities

The US dollar index is certainly reflecting a “bring it on” attitude this morning. It’s up 0.5% to 97.15.

The jump in the greenback caused pause on the LME last night following Tuesday night’s big gains, with metal prices mostly a little weaker. Copper still managed a 0.4% gain.

If the materials sector was the place to be yesterday on Bridge Street, look out today. Iron ore is up US$3.10 or 6% to US$55.30/t.

West Texas crude also continued its relief rally, rising US$1.12 to US$48.88/bbl, while Brent gained US57c to US$53.63/bbl.

The ol’ rabbit in the headlights – gold – is steady on US$1096.70/oz.

The rise in the greenback has helped the Aussie down 0.6% to US$0.7293.

Today

The SPI Overnight closed up 33 points or 0.6%.

Locally we see June building approvals numbers today, and Glenn Stevens will give a speech in Sydney.

A day after the Fed statement, all eyes will be on the first estimate of US June quarter GDP, due tonight. Economists are expecting 2.5%.

On the local stock front, today sees earnings reports from Energy Resources of Australia ((ERA)), GUD Holdings ((GUD)) and Henderson Group ((HGG)).

Rudi will make his weekly appearance on Sky Business' Lunch Money (noon-12.45pm) and later again on Switzer TV, between 7-8pm.
 

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