The Overnight Report: On The Other Hand?
By Greg Peel
The Dow closed down 111 points, or 0.8%, while the S&P dropped 1.1% to 1553 and the Nasdaq fell 1.1%.
It was a strange day on the local bourse yesterday. The index took a lead from Wall Street's red cordial rally on Tuesday night and rose 0.5% to lunchtime, at which point a better than expected trade balance number was released and the Chinese service sector PMIs showed increases to 55.6 from 54.5 (official) and 54.3 from 52.1 (HSBC). Then someone blew a bugle and the sellers came thundering in.
Reports variously cited "soft commodity prices" and a "weak Chinese market" as triggers. Certainly the resources sector was hardest hit, but commodities prices were just as soft at the opening bell as they were a few hours later. There was talk of tighter Chinese bank restrictions being enforced, but the Shanghai index was only down 0.1% on the day. Methinks perhaps the button was pressed on a rather large sell order, possibly from offshore, and the herd did the rest. But that's just speculation on my part. The index closed down 0.5%.
Whatever the trigger, it was a prescient move. Commodity prices were hard hit last night and it began with some weak US economic data.
US jobs figures in recent months have looked somewhat healthier, but last night's ADP private sector report for March showed the addition of only 158,000 new jobs when 215,000 were anticipated. The official jobs report is out tomorrow night. The US service sector PMI showed a fall to 54.4 from 56.0 ? still indicating reasonable expansion, but disturbing for a high-flying Wall Street nevertheless, particularly when coupled with Monday night's weaker manufacturing PMI.
The data were enough to bring in the sellers, and news that the US was moving missile defence systems to Guam "just in case" began to unnerve the market. Members of the US administration appeared on the screens sounding more grave, and toward the end of the session a news report suggested the North Korean military had been given the green light to launch a nuclear strike on the US (it could only be Hawaii) if necessary.
Those less concerned about the rogue state point to the same game having been played many times over in the past. North Korea ups the ante, talks tough, and then agrees to back down again only if sanctions are lifted. Stricter sanctions have been imposed ever since the state began testing rockets for supposed satellite deployment, which everyone else assumed to be missiles. Presumably the North Koreans are currently starving to death as usual.
The tension is unsettling nonetheless, and more unsettling was a surprise comment from San Francisco Fed president John Williams in the afternoon that if the employment scene improved, the Fed could begin winding back bond purchases (QE3) this summer and come to a halt by the end of the year. The comment seems at odds with Bernanke-speak, and also at odds with Williams' usual stance of open-ended QE. So add it up and last night we had a weaker jobs number and talk of a Fed exit.
A Fed exit would not be good news for gold fans, but gold had already fallen again last night prior to Williams' remarks. Clearly the gold market is discounting a nuclear war, or the metal would not have been down another US$17.20 to US$1558.70/oz having fallen over twenty dollars on Tuesday night. The US dollar index was actually down 0.2% to 82.72 on the weaker data. A disinterested Aussie is steady at US$1.0455.
Conversely, US bonds saw some interest once more, with the benchmark ten-year yield falling 5 basis points to 1.81%.
Base metals took another hit in London, with a 1.5% fall in copper and 2% fall in nickel the major moves. The weaker US data met a surprise jump in US weekly crude inventories, tipping the oils over the edge. Brent fell US$3.58, or 3% to US$107.11/bbl and West Texas fell US$2.82 or 3% to US$94.37/bbl.
Spot iron ore fell US50c to US$135.60/t.
The SPI Overnight fell 35 points, or 0.7%, despite the physical's steep fall yesterday.
Is this the start of the pullback everyone's been waiting for? It was notable that the Dow was down over 130 points half an hour from the bell and then swiftly rallied to be down only 80 points as the bargain hunters yet again moved in. It was the North Korea nuclear readiness report which scared them off on the death. There is still not a lot of conviction from traders that a decent pullback is on the cards.
The March quarter corporate reporting season begins in the US next week, which no doubt will help to establish the mood for April. Ahead of infamous May. Note also that US tax payments are due by April 15, which often evokes some "tax selling" in the lead up.
Rudi will appear on Sky Business today at noon.