The Overnight Report: No Reason Not To Buy
By Greg Peel
The Dow rose 128 points or 0.8% while the S&P gained 0.4% to 1770 and the Nasdaq fell 0.1%.
Bridge Street clearly had a hangover yesterday, feeling quite ill early in the morning but managing to at least brighten up to feeling flat by day's end. The news of the day was the September trade balance which came in at a deficit of US$254m when economists had been expecting about twice that much.
The difference was a greater than expected fall in imports of net 1%, with consumption goods and capital goods down 3% each but intermediate goods up 2.6% on an 11.6% increase in oil and related imports. Clearly the strong Aussie dollar is yet to flow through to cheaper oil prices. The small deficit belied the fact the ABS has this month widened the scope of its model to capture imports below $1000 in order to account for Australia's online offshore shopping boom. Post adjustment, the trade balance has been in deficit for 21 months.
China rules. Of total exports, 39% went to China. Iron ore exports were up an extraordinary 57% year on year in September in dollar value reflecting both strong prices and strong volumes. Coal exports are down 3%. Metal exports now account for over 5% of GDP.
The lower than expected deficit implies a stronger than expected Australian economy. Thus the Aussie jumped on the release yesterday and is up 0.4% to US$0.9531 over 24 hours. So much for Glenn's attempts to talk it down. Yet ANZ's economists suggest net exports appear to have contributed only modestly to September quarter GDP, and CBA's economists note the strength in commodity exports is in line with RBA forecasts. Nevertheless, CBA is tipping 2.5% to be the bottom in the RBA's cash rate cycle.
A research paper highlighted by Goldman Sachs earlier this week suggests the 6.5% US unemployment is still too high a threshold to justify the first increase in the Fed funds rate. Goldman's chief economist is tipping a reduction in the Fed's threshold to 6% in March at the time the central bank announces tapering will begin. It could possibly happen in December, but March is more likely. Meanwhile, economists are forecasting an increase in the unemployment rate to 7.4% in October from 7.2% in September to reflect the shutdown. The October non-farm payrolls data are out tomorrow night.
Which all adds up to a US dollar that is unlikely to rally meaningfully anytime soon, and thus an Aussie which will struggle to find any reason to fall. And wait till we start exporting LNG from PNG and Queensland.
Talk of a lower US unemployment threshold helped to weaken the US dollar index last night, and strength in the euro pushed the dollar index down 0.3% to 80.48. The eurozone service sector PMI was released last night and showed a drop to 51.6 from 52.2 in September. The composite index (adding in manufacturing) fell to 51.9 from 52.2. But both numbers exceeded last week's flash estimates, and both remain in expansion territory. Doubt has thus crept in over whether the ECB will cut its interest rate tonight, which seemed certain earlier in the week after eurozone inflation data suggested Europe risked slipping into deflation.
Microsoft is apparently close to deciding who will be its new CEO, which was enough for Microsoft shares to jump 4% last night. This move helped the Dow to a solid gain and new blue sky, while the S&P's more modest gain means the benchmark is sitting just under its previous high. Nasdaq weakness last night was the offset. Fans of electric cars will not be pleased to see Tesla dropping 14% on lower than expected sales.
The US earnings season is winding down and the scorecard has been considered as healthy, and better than expected. Cuts to fourth quarter forecasts have not been as bad as might have been given the shutdown period. With the Fed playing backstop, commentators are hard pushed to find a reason Wall Street should do anything but grind higher over the traditionally positive Christmas period. Whatever derails the rally will have to come out of left field.
Fears of another round of stalemate and potential shutdown early in the new year are fading as Congressional and mayoral elections in some parts of the US are showing a solid swing away from the Republicans, with the Tea Party being blamed. The Republican candidate for Virginia believes America's recent woes are God's retribution for legal abortion.
Base metals saw weakness in London overnight as long positions exit ahead of important events over the next two days, specifically the ECB policy meeting and US third quarter GDP result tonight, and US jobs numbers on Friday night. All metals were down, with copper down 0.6% and nickel down 1.5%.
They spun the weekly US oil inventory chocolate wheel last night and it landed on a lower than expected increase for last week, so once traders had overcome their