The Overnight Report: China Excitement Subsides

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By Greg Peel

The Dow closed up 7 points while the S&P gained 0.3% to 2069 as the Nasdaq jumped 0.9%.

Forty basis points off China’s benchmark central bank rate is worth 3.3% to a beaten-down Australian mining sector, it would seem. Throw in a 2.5% gain for energy stocks and yesterday’s 1.1% recovery rally in the ASX200 was very much resources led. The supermarkets and banks also found some support but no one wanted the telco on the day.

China has now joined the “whatever it takes” brigade after deciding the government’s 7.5% growth target is indeed under threat. Japan became a member recently when it turned up the volume on QE while the eurozone has long been a member in spirit, albeit only now reinforcing that with action.

The US is the odd one out, having completed its five-year program of whatever-it-takes QE, although there remains the option of restarting if deemed necessary. It all comes down to the data, and last night’s data releases were not hugely supportive.

The Chicago Fed national activity index came in at 0.14 this month when 0.40 was expected. That’s down from last month’s 0.29, which was revised down from an original 0.47. A flash estimate of Markit’s US service sector PMI for November came in at 56.3 to mark its lowest level since April. Economists had expected a rise to 57.3, up from October’s 57.1.

There was better news across the pond at least, where Germany’s IFO business sentiment survey showed a rise to 104.7 to end six consecutive months of declines. October’s reading of 103.2 represented a two-year low.

Four days out from Thanksgiving, trading has already begun to thin out on Wall Street as many take a full week’s break. Last night was a quiet session in which the gains prompted by the Chinese rate cut on Friday were consolidated but not much improved upon. After a boost on Friday, commodity prices mostly fell back again last night.

Talks between Iran and six major powers regarding the country’s nuclear program have been extended to June 30, it was announced last night. The extension is comforting for oil markets, as were sanctions to be lifted Iran could recommence oil exports at a time oil prices are under considerable pressure. It was still not enough to bolster oil prices last night nevertheless, in a market that is still very nervous and very much in the dark over whether OPEC will or won’t cut its production quota when it meets on Thursday.

Observers suggest a rift has formed between OPEC leader Saudi Arabia, who would rather take the temporary pain of lower prices in order to force rationalisation of US shale production, and other members who simply don’t want low prices to last any longer. Last night Brent crude fell back US94c to US$79.60/bbl and West Texas fell US87c to US$75.73/bbl.

Excitement also dimmed on the LME after Friday’s healthy gains. Copper fell back 0.7% and zinc 0.5% in a session in which only lead managed any noticeable gain.

The big snap-back rally for Australia’s iron ore producers yesterday came despite an ominous drop in the iron ore price below US$70, but last night saw a welcome US20c increase to at least recover that US$70.00/t mark once more.

The Aussie enjoyed a surge on Friday night but has fallen back 0.7% to US$0.8613, largely from whence it came. The US dollar index is also 0.2% lower at US$88.14, while gold has slipped back US$2.70 to US$1198.30/oz.

The SPI Overnight closed down 3 points.

It will be a big night in the US tonight as economic data releases are crammed in ahead of the holiday. The Case-Shiller and FHFA house price indices are due along with the Richmond Fed manufacturing index and the Conference Board monthly consumer confidence measure. The first revision of the September quarter GDP result will also be released, for which economists expect an unchanged 3.0%.

Aristocrat Leisure ((ALL)) reports its FY14 result today while pitchforks will probably be brandished at Cardno’s ((CDD)) investor day. Beach Energy ((BPT)) is also holding an investor day and there is a handful of AGMs being held.
 

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