By Rudi Filapek-Vandyck
US equities resumed their steady rise in overnight trade. The DJIA gained 69.07 points to close at 13,323.36. The world's best known share index is now within 6% of its all-time high of 14,164.53 reached in October 2007. The more representative S&P500 rose 4.48 points to 1433.56, but the Nasdaq barely managed a gain of 0.51 points, as Apple failed to join the party. Apple's shares slipped another 0.53% to US$659.21 last night.
Behind those numbers, and as reported in yesterday's Overnight Report, lies a steady portfolio switch out of utilities, consumer staples and other outperformers from the past into under-owned energy, miners, cyclical industrials and financials. Also out were luxury goods and high end consumer stocks after Britain's largest luxury- goods maker Burberry issued a stern full-year profit warning earlier in the day.
I can only assume you all know the drill by now: low volumes, erratic movements and behaviour, full of speculation and anticipation as to what this week's FOMC meeting might bring. Sure, Europe has a few items on the calendar as well, but Mr Market has gradually taken the view that all shall be okay on the Old Continent and that the Big Event this week will be another round of QE from Bernanke and Co. But what exactly will Helicopter Ben present to the world on Friday (Sydney time)?
Consensus is assuming the Fed will extend its zero rate policy from late 2014 to sometime in 2015. Varieties are: mid-2015? Late 2015?
Then there's the Big Bazooka which, in the view of most experts, won't be as big as many are hoping for, but that's not stopping anyone from getting cautiously excited at this stage. We'll probably see some structured plan whereby the Fed buys more US Treasuries as well as other yield instruments, like mortgage backed securities. Meanwhile, we can all speculate freely about the size of this week's QE3 program. US$400bn? US$300bn?
Then there is a whole gamut in potential extras. Will the Fed keep QE3 "open ended" whereby each meeting will come with a decision to continue, extend or cease? Will the Fed announce a specific target with regards to unemployment, as in: no interest rate hikes until we see 7% or less?
All fun and games and we will all see what's going to happen on Friday.
Meanwhile, in that other hot spot of international anticipation, Europe, the calendar looks pretty full too for Wednesday (today):
- We have the German Constitutional Court making an interim ruling on the legality of the Fiscal Compact and the ESM. "Nein" means Plan A is dead and Europe will have to come up with an alternative (I know what you're hoping for right now)
- The Netherlands will hold Parliamentary elections and expectations are for a significant boost for the centre-left and far-left
- EU Commission President Barroso will make his annual "State of the Union" speech. Usually the world disregards this event, but this time Barroso may want to announce some additional initiatives around the eurozone crisis, plus he will announce proposals on the Banking Union. Could be very interesting.
Meanwhile, Greece (remember them?) is still struggling to find an additional EUR11.5bn of fiscal consolidation. The Troika has rejected more than half of the proposals put forward by the Greek Government and it would appear the next logical step is to "do a Queensland" on those poor Greeks, meaning government jobs will have to go. Prepare for more demonstrations in the streets of Athens and for irate Greeks carrying communist flags and Nazi swastika's on your TV screen.
Spain (I am sure you remember them) is reportedly creating EUR6bn of government securities, which it plans to inject into the country's bank-rescue fund to bolster its capital. The yield on Spanish government bonds continued to slide on the news.
In the world that doesn't matter that much at the moment, the US trade deficit rose modestly from US$41.9bn to US$42bn in July, below forecasts of US$44bn. US chain store sales were 2.7% higher than a year earlier in the latest week according to Redbook, up from 2.5% the previous week.
And Moody's Investor Services (remember them?) has warned the US credit rating may be downgraded if budget negotiations fail to yield measures that will lower the deficit and government debt. That'll be a matter for after the Presidential elections. Surprisingly as it may seem, the US still enjoys a Aaa rating in the Moody's credit rating universe.
US treasuries were mixed on Tuesday as investors prepared for key events over the next few days. There was solid demand for an auction of $32bn of three-year notes - the ratio of bids to the amount offered was 3.94 - the highest ever for a three-year auction. US 2yr yields fell by 1pt to 0.25%, but US 10yr yields rose by 4pts to 1.70%.
The US dollar fell against major currencies in European and US trade on Tuesday. The euro rose from lows near US$1.2760 to US$1.2870 and closed US trade near US$1.2855. The Aussie dollar rose from lows near US103.20c to lows near US104.50c and ended US trade near US104.30c. The Japanese yen strengthened from 78.23 yen per US dollar to JPY77.69 and ended US trade near JPY77.75.
Commodities continue to enjoy buying support as well, with spot iron ore in China climbing 5.5% to US$100.20 a ton, The Steel Index Prices reports.
Benchmark crude oil prices rose again on Tuesday in choppy trade as OPEC reported production rose by 260,000 barrels per day in August. Brent crude rose by US59c to US$115.40 a barrel. US Nymex crude rose by US63c to US$97.17 a barrel. Base metal prices posted modest gains on the London Metals Exchange. Aluminium performed the best. The December Comex gold futures price rose by US$3.10 an ounce to US$1,734.90 an ounce.
Ahead: In Australia, consumer sentiment data is released together with figures on dwelling starts. In the US, the Federal Reserve begins a two-day meeting. For what's happening in Europe today: see above.
Greg Peel is on assignment in China this week. I will be on Switzer TV tonight, Sky Business, between 7-8pm.
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