The Overnight Report: ECB Turns On The Taps

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By Greg Peel

The Dow closed up 19 points or 0.1% but the S&P gained 0.9% to 1904 as the Nasdaq rose 1.4%.

The big rebound on Wall Street on Friday night, and the return to dovishness for the Fed which helped drive it, was enough to provoke excitement on Asian bourses yesterday. On Bridge Street it was all green on screen for a 0.9% gain as the local recovery continued across all sectors, while the star of the region yesterday was Japan, which saw a 4% jump for the Nikkei.

The mood did not carry through to Europe nevertheless, although arguably the big moves up on European bourses on Friday were also a reason Wall Street opened strongly, so there would have been an element of double-up. Indeed, the German index fell back 1.5% last night while France fell 1.0% and London fell 0.7%.

Germany released its September producer price index last night and while the 1.0% year on year fall was not unexpected, it underscores the task ahead of the ECB if a 2% consumer price index target is ever to be reached. To that end, the ECB announced last night it had begun to purchase covered bonds – bank-issued bonds backed by residential mortgages or other loans – across the spectrum of member nations. At this stage the purchases are small, in the order of E25m each.

The purchases represent part of the stimulus plan previously flagged by Mario Draghi while in the meantime, discussions over ECB purchases of eurozone government bonds continue, with Germany’s resistance remaining a stumbling block.

European selling has typically carried across to the opening on Wall Street this year but the Dow didn’t need much help from Europe to plunge 120 points from the bell. Tech dinosaur and Dow component IBM posted an earnings miss which saw its shares fall 7% on the session.

IBM’s result bucked the trend of earnings results to date which have been net positive in “beat” terms, and the sharp rebound in new-world tech stocks and small caps continues a-pace. We recall that these momentum stocks have been the first to spark this year’s sell-offs and that the Russell small cap index fell well into correction territory this time before turning around last week. The Russell posted another 1% gain last night, while the Nasdaq chimed in with 1.4%, helping to lead the broad market S&P out of its initial weakness to a 0.9% gain, and the Dow eventually back to the flatline.

The S&P has now recovered the 1900 level, which it fell through a week ago. For the record, Apple posted a solid earnings beat after the bell last night, featuring strong local sales of the iPhone6 offerings offset by disappointing Chinese take-up.

Having fallen back on Friday night, eurozone government bond yields rose again last night despite news of ECB covered bond purchases commencing. Presumably this news was somewhat of a disappointment, alongside the weak German PPI number, when European markets are anticipating ECB direct purchases of government bonds. The US ten-year yield fell back 2 basis points to 2.18%.

Some of the heat has now come out of the US dollar following the return of Fed dovishness late last week. The dollar index is down 0.3%. Gold is subsequently ticking higher and is up US$8.10 to US$1246.10/oz, and the Aussie is up 0.4% to US$0.8791.

The bounce in oil prices has proved short-lived, with Brent crude falling US87c to US$85.35/bbl last night. The West Texas contract has now rolled over to match Brent on a December delivery front month, and it was steady at US$82.03/bbl while losing a dollar in the rollover. There is still much debate over whether OPEC will cut its production quotas at this month’s meeting, as has always been the case in the face of weak prices in the past, or seek to squeeze out the actual culprits of oversupply by maintaining production and leaving it to US shale producers to respond.

LME Week began last night in London, and this annual event typically draws metal market participants away from their desks to leave thin and choppy markets. Last night was no exception, with nickel and zinc falling over 2% and copper dropping 0.6%.

Iron ore rose US60c to US$81.20/t.

The SPI Overnight closed up 13 points or 0.3%.

It’s a big day for the Australian and global markets today. The RBA will release the minutes of its last meeting but they are not expected to move any mountains. The big event is the release of China’s September quarter GDP, alongside a dump of industrial production, retail sales and fixed asset investment numbers for the month of September. Consensus has China’s GDP at 7.2% annual, down from 7.5% in June.

On the local corporate front, quarterly production reports from Newcrest Mining ((NCM)) and Oil Search ((OSH)) provide the highlights.
 

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