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Overnight: Yellen Delivers

The Dow closed up 123 points or 0.6% while the S&P gained 0.7% to 2443 and the Nasdaq jumped 1.1%.

Ground Hog Day

I suggested yesterday that a 20 point gain for the ASX200 was more pleasing than a one hundred point rally towards 5800 that would inevitably be followed by an equivalent fall to 5680. Well, so much for that. The morning coin toss came up tails so traders sold down the banks, having bought them up the day before.

And the rest of the market followed suit, with iron ore and gold miners providing the only real resistance. The banks fell -1.1% while materials closed flat. Healthcare tanked again with a -2.1% drop as everyone who bought CSL ((CSL)) last month rushes out again this month. The lawsuit is not helping. Yield plays were also sold once more.

So again one must ask the question: What changed? Certainly commentators were not calling a -50 point fall or anything like it yesterday morning and the futures were up 5 points.

There is talk that APRA's decision on “unquestionably strong” with regards to bank capital is nigh, but then the likelihood of this leading to forced raisings appears to be very slim. Domain ((FXJ)) has noted a drop-off in the pace of sales growth in the property market but that’s knock-me-down-with-a-feather stuff.

Did the local market simply decide to shift to the sidelines ahead of Yellen’s testimony, only to find half the market skiing with the kids in Thredbo?

The index dropped from the get-go and hit 5680 late morning where, as usual, buying support was found. But the subsequent rally lasted only as long as lunchtime before a slow drift back down again to the closing bell. The index closed at 5673, the Dow hit a new high overnight, and the futures are up 27 this morning.

The coin will probably come up heads.

A couple of stories to note from outside the ASX200 yesterday:

Furniture company Adairs ((ADH)) was trashed late last year following a profit warning. Yesterday’s trading update indicated management had turned things around, and the stock shot up 34% without being heavily shorted. Shipping container conversion company Royal Wolf Holdings ((RWH)) received a takeover bid from the US and jumped 37%.

Within the index, Resolute Mining ((RSG)) was the best performer in a weak session with a 2.7% gain following a strong production & sales report, providing support for all gold miners as quarterly reporting season ramps up for the sector.

Not Normal

The Fed raised its cash rate for the first time post-GFC in December 2015 and for the second time in December 2016. It began 2017 suggesting three rate rises were likely and has delivered two to date, in March and June. For a while there Wall Street began to fear three in 2017 might become four, on top of the first steps to unwind the central bank’s massive bond holdings.

But the signs are now ambiguous. The US economy is improving but in a wobbly way. US corporate earnings are undeniably strong but GDP growth is slim. The labour market is unquestionably tight, yet inflation remains tepid. Before Yellen’s testimony last night to the House finance committee, Wall Street was assuming only one more hike, in December, giving a September hike less than a 50% chance.

Last night Yellen suggested monetary tightening would be “gradual”. But she’s been saying that all along. She also reiterated her belief the factors keeping a lid on inflation would ultimately prove temporary. But what caught Wall Street’s eye was a suggestion that while the plan is to return rates to a neutral setting, that rate is now lower than it used to be, and on that basis not so far away.

There has been much talk over the past few years of what the “new normal” might now be in a post-GFC world. The general conclusion is that “normal”, or a neutral rate setting, is lower than it used to be in the wake of a lengthy period of historically low rates. It’s not a new idea, but in hearing Yellen reinforce the argument, Wall Street has now dropped the chance of a September rate rise to 20% and December only 50/50.

It may also be that the Fed will slow the pace of rate rises and start tapering its balance sheet instead. But last night saw the US ten-year yield fall -4 basis points to 2.32%.

For the US stock market, fears of the Fed hiking steadily over the next couple of years have now abated. It’s good for stocks in general – less so for the banks but even they were slightly higher last night as every S&P500 sector posted a gain. The Dow hit a new record high, with the S&P and Nasdaq still a bit shy given the recent Big Tech sell-off, but a 1.1% gain for the Nasdaq confirms Big Tech was back in favour again last night.

The Dow was up 177 points from the open – the transcript of Yellen’s prepared testimony was released at 8.30am – so it was otherwise a relatively fat session after the initial pop, with a bit of a drift-off towards the death.

The oil price ticked up further, which helped.

Yellen will testify before the Senate banking committee tonight but typically nothing new is divulged in round two. We then move onto Friday’s big data drop and the first earnings reports from the big banks.

It is worth noting that the Bank of Canada delivered its first rate hike post-GFC last night, which might be a little concerning downunder given the lookalike nature of Canada’s commodity-based economy. However the 25bps hike took the BoC’s rate only to 0.75% when the RBA cash rate is at 1.5%. Given the US is Canada’s significantly dominant trading partner when ours is China, the BoC had to follow the Fed down back in the day, more so than the RBA.


One might have expected the US dollar to be weaker on Yellen’s testimony but movements elsewhere kept the dollar index flat at 98.78. Note that the Canadian dollar is in the US dollar index and the Aussie dollar is not.

One might have expected a relief rally for gold as well, but it’s only up another couple of dollars at US$1220.00/oz.

West Texas crude gained another US40c to US$45.44/bbl on confirmation of a weekly US crude drawdown.

Iron ore rose another US60c to US$65.30/t.

Nickel was up 1% in London and was the only base metal to move by a percent or more.

The Aussie spiked last night on the BoC hike, and is up 0.6% at US$0.7678.


The SPI Overnight closed up 27 points or 0.5%.

China’s June trade numbers are due today.

Whitehaven Coal ((WHC)) and Northern Star Resources ((NST)) provide quarterly reports.

Rudi will travel to Macquarie Park for an interview on Switzer TV tonight, on Sky Business, 7pm.

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