The Overnight Report: Fed Watch

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By Greg Peel

The Dow closed up 39 points or 0.2% while the S&P gained 0.1% to 2506 and the Nasdaq rose 0.1%.

Lacklustre

A promising start to the local market yesterday soon gave way to what was ultimately a whimpering finish. The ASX200 was up 22 points from the open and down -6 at the close.

The stand-out sector on the day was telcos, which gained 1.2%. TPG Telecom ((TPM)) posted a better than expected earning result and despite soft guidance and a cut in dividend, the stock jumped 5%. We need look no further than the ASIC data for justification — the stock was over 7% shorted.

TPG is nevertheless not big enough to move the sector dial by that much so it was up to Telstra’s 1.1% ((TLS)) gain to provide the oomph. Traders tossed a coin in the morning and this time it came up heads.

Materials was the only other sector to finish in the green yesterday, but only by 0.1%. Thus we can say Telstra’s gain was countered by every other sector, all of which closed in the red by not much. A -0.6% drop for healthcare was the biggest move, but Cochlear ((COH)) went ex.

Mayne Pharma ((MYX)) is in the sights again, falling -4%. As of last week it was 10.5% shorted.

On the other hand, Galaxy Resources led the ASX200 with a 5.6% gain, being 11.3% shorted.

The minutes of the RBA’s September meeting, released yesterday, provided no surprises.

If we compare to the August minutes we find the only real difference is a nod to the recent rally in the Aussie dollar:

“The appreciation of the Australian dollar over recent months, driven in part by a broad depreciation of the US dollar, was weighing on domestic growth and contributing to subdued inflationary pressure. A further appreciation of the Australian dollar would be expected to result in a slower pick-up in growth and inflation.”

The conclusion nevertheless remained the same: “…the need to balance the risks associated with high household debt in a low-inflation environment” kept the cash rate on hold.

Nothing to see here

Forty one and counting. Once again the Dow, S&P and Nasdaq all posted new records by creeping slightly higher.

The Fed meeting began last night and the policy statement will be released tomorrow. Janet Yellen will hold a quarterly press conference. It was thus a good day to do nothing, although in recent times we have often seen sharp movements on the day before Fed announcements.

The overwhelming consensus is that the Fed will leave its funds rate on hold and announce a starting date for what will be a very gradual unwinding of its massive balance sheet. The only point of interest will be whether the rhetoric leans more to the hawkish or dovish side, thus shifting the odds of a December hike.

Those odds have crept back over 50% but there is also the matter of Harvey and Irma and what cost they will prove to be in the September quarter GDP result. It’s possible they could be the excuse, albeit “transitory”, for the Fed to hold off in December.

And as we speak, Maria is threatening to hit Puerto Rico head on as a Category 5 before moving on to demolish the already demolished British Virgin Islands. At this stage it looks likely to swing east past the Bahamas rather than west towards Florida, but there it could join up with a lingering Jose and cause all sorts of problems right up to the New England coastline.

Or it could deviate and slam into the Carolinas. It’s another week of weather watch.

Wall Street paid little attention to Donald Trump’s address last night to the UN in which he warned “Rocket Man” Kim if the US was forced to defend itself, it could destroy his country. Meanwhile the Pentagon seems to believe there is a military option that would cripple North Korea without Seoul being destroyed in the response.

The Chinese called these comments “unhelpful” and few disagree. Wall Street continues to believe a military option is not realistic, and thus is not overly concerned about the threat.

A more realistic threat is Amazon. It was confirmed last night that Toys’r’Us has filed for Chapter 11 while car parts retailer Autozone fell -5% after posting a weak result that analysts have blamed on you know who.

Commodities

Iron ore is beginning to lose its grip. It fell -US$2.50 to US$68.30/t.

Nickel dropped around -0.5% in London last night to be the only metal not to post a gain. Aluminium and lead stood out with 2% jumps.

Oil markets have gone to sleep, with West Texas crude down a tad at US$49.86/bbl.

A -0.2% fall in the US dollar index to 91.83 helped gold largely hold its ground at US$1310.70/oz.

On Monday night the Aussie fell half a cent as the US dollar rose but yesterday traders took the RBA’s currency warning as a reason to buy, and now we’re back where we stated at US$0.8009.

Today

The SPI Overnight closed up 13 points or 0.2%.

All eyes on the Fed tonight.

Locally, Premier Investments ((PMV)) will release its earnings result. Today’s list of ex-divs includes Newcrest ((NCM)) and Macquarie Atlas Roads ((MQA)).
 

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