SCOREBOARD: Shiny metals

Strong China data and rising hopes for the US economy boost investor appetite for risk trades.

Solid Chinese import data yesterday – especially for metals – appears to have sparked up some risk, for last night at least, and we are seeing decent gains across the commodity and equity space. Copper, for instance, is up 2.7 per cent, silver is 3.6 per cent higher and gold has added a further $13 to sit at $1,632. It’s probably not just the Chinese data that’s moving things though – a few factors have swung into place recently that might force a rethink on the landscape.

The US economy looks to be accelerating, or at least growing, at a reasonable clip, which contrasts with all the talk of a double dip. Then Alcoa reported decent earnings last night and seems quite confident on the outlook for 2012. Lastly, it appears almost certain that the Fed will print more money – nearly all the Fed rhetoric points this way and even some of the hawks aren’t ruling it out, though they remain sceptical of its effectiveness.

This, of course, is all very supportive of risk trades and that’s what we saw, although crude prices are also being influenced by tensions with Iran – WTI up 1 per cent to $102.3 and Brent is 0.7 per cent higher at $113.2. In the equity space then, European stocks had a solid session with the Dax up 2.4 per cent, the CAC up 2.7 per cent and the FTSE up 1.5 per cent – basic materials and financials the key outperformers. Things weren't quite as good on Wall Street, but it was a solid session nevertheless. So the S&P500 closed almost 1 per cent higher (1,292) and again, basic materials, financials and industrials were the key outperformers (all sectors up though). The Dow added 0.6 per cent (12,462), the Nasdaq gained 1 per cent (2,703) and Australia’s SPI is 0.7 per cent higher at 4,149.

In the debt space, there were a few auctions on both sides of the Atlantic and they seemed to go okay. Demand for US 3-years in particular looked to be strong, with cover at 3.73 and record bidding interest. Around $32 billion was sold off at a yield of 0.37 per cent with indirect bidders taking about 38.5 per cent. This strong demand probably helped put a cap on yields despite moves elsewhere and, as I write, Treasury moves in the secondary market have been quite modest. The 10-year traded within a 5bps range to be at 1.97 per cent currently or pretty much unchanged from 1630 AEDT yesterday. The 5-year too was on a tight range (3bps) and sits at 0.85 per cent (little changed), while the 2-year is at 0.24 per cent. Australian futures took their lead from the US and did nada – the 3s at 96.83 after a low of 79, while the 10s are at 96.155 on a 4 tick range.

Finally for the price action, the Australian dollar was up smalls (from 1630 AEDT) to sit at 1.0325 and it’s a similar story elsewhere with the euro little changed at 1.2791. Sterling is otherwise at 1.5488 and the yen sits at 76.82.

Bits and pieces otherwise and none of it was major. Adding to signs that the US economy is accelerating, wholesale sales rose by 0.6 per cent in November, after a 0.8 per cent rise the month prior, to be 11.3 per cent higher annually. Inventories were up 0.1 per cent. Elsewhere, there is talk in the papers that hedge funds have bought up Greek debt with a view to forcing a credit event by refusing to voluntarily participate in any writedown. But then other news stories suggest that Greece is close to a deal and could announce one next week (citing comments from the PM Papademos).

Looking at events for Wednesday – in Australia we see Westpac’s January consumer confidence figures (1030 AEDT) and job vacancies for November (1130 AEDT), although the latter isn’t market-moving data. It’s pretty light on otherwise. We see UK trade data, mortgage applications in the US and then the Beige Book (anecdotal report from US Fed districts). There is a 2017 German issue tonight as well, which will be worth watching.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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