The Overnight Report: And They Saw It Was Good

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By Greg Peel

The Dow closed up 221 points or 1.3% while the S&P gained 0.6% to 1994 and the Nasdaq added 0.4%.

Wall Street seems a little confused immediately after the release of Wednesday night’s Fed statement, surprised by a suddenly more hawkish Fed when a dovish Fed was expected. A flattish close was testament. The question then was: what would the Australian market do? A hawkish Fed equals a rising interest rate, equals less attractiveness of the carry trade, equals Sell Australia, as was the case in September when last Wall Street decided the Fed was hawkish.

So they bought it.

Indeed they bought everything that was sold down in September, being the big caps, except for resources. The banks were strong, aided by a well-received result from National Bank ((NAB)), while healthcare, the telco, and the supermarkets all chimed in for a 0.5% gain.

Judging by last night’s session on Wall Street, it was the right decision. That is, if one assumes Australia and the US should be in lock-step, which may not prove to be the case when interest rate differentials begin to take centre stage again.

Wall Street initially dropped on the open last night, down 50 Dow points, before turning around for a steady 200 point rally. Strength was supported by the release of the first estimate of US September quarter GDP which came in at 3.5%, well ahead of 3.0% forecasts. A strong earnings result from Visa (Dow) was another contributor, with Visa shares rising 10%. The transaction facilitator is seen as a barometer for the economy.

Visa’s move nevertheless distorted the picture, providing a reminder the Dow is a bit of a relic which is only valuable for its iconic status. Despite the 1.3% rally in the Dow, the broad market S&P 500 rose a less inspired 0.6% and the Nasdaq managed only 0.4%. 

Wall Street had long expected the September quarter GDP result to be a strong one. The March quarter was a weather-impacted disaster and the June quarter managed to steady the ship, but September was the quarter in which economists foresaw the real rebound. Last night’s number was only the first estimate and is yet subject to revision – possibly significantly so – but if we assume 3.5% growth is accurate, the Fed is somewhat vindicated in its seeming about-face.

However, if we break down the numbers the result looks a little less exciting. Government spending rose 10% in the quarter, mostly from the Pentagon, to represent the biggest public contribution to GDP since the 2009 Obama stimulus package. The good news is exports surged 7.8% when imports fell 1.7%, but if a rate rise is around the corner and the greenback continues its rally, those numbers will begin to reverse. Meanwhile, consumer spending – the largest contributor to GDP – slowed to a 1.8% annual rate of growth from 2.5% in the June quarter. Business investment in equipment and housing construction all slowed.

Having risen on Wednesday night, the US ten-year bond yield slipped back one basis point to 2.31%. The US dollar index rose, but only by 0.1% to 86.16. The gold market was more fearful of Fed policy nonetheless, falling another US$13.50 to US$1197.30/oz.

On Wednesday night the Aussie fell sharply, in step with the Fed-related rise in the US dollar. Nothing much has changed, the greenback was again higher last night, but the Aussie is back up 0.4% to US$0.8831, all of which occurred during the overnight session.

Base metal activity was relatively muted on the LME. Aluminium was steady, copper and lead slipped a little and the others posted small gains.

Iron ore posted a no doubt welcome rally, up US40c to US$79.00/t.

Having rebounded for two sessions, oil fell back last night, again facing the spectre of a rising US dollar. Brent lost US$1.18 to US$86.06 and West Texas lost US$1.24 to US$81.01/bbl.

The SPI Overnight closed up 16 points or 0.3%.

One might argue that global markets are still not entirely sure just what to do right now. Fed policy is clearly the global swing factor, and the Fed will be responding to ongoing economic data flow. QE3 ends next month, yet Wall Street has known this all year and has hardly been ambushed. Can signs of US economic strength overcome fears of the first US rate rise?

ANZ Bank ((ANZ)) will report full year earnings today and Macquarie Group ((MQG)) its interim, amidst more AGMs and resource sector production reports. Australia’s September quarter PPI is due today along with monthly private sector credit data.

The Bank of Japan will hold a policy meeting.

 

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