The Overnight Report: Bouncing Ben


By Greg Peel

The Dow rose 115 points, or 0.8%, while the S&P gained 0.6% to 1496 and the Nasdaq added 0.4%.

Democratic Italy has never had a hung parliament before, which seems remarkable given Italian governments are typically assembled as uneasy coalitions. A constitutional requirement of a majority in both houses has clearly been a definitive factor. If Australia had this requirement, there would have been few governments, federal or state, formed in this country in recent times.

The Italian candidate parties have up to 20 days to attempt to avoid a hung parliament through coalition concessions, but given Bersani has refused to co-ally with Berlusconi and Grillo has refused to co-ally with anyone, a last minute solution is unlikely. Notwithstanding Bersani is left and pro-austerity, Berlusconi is right and ready to roll back austerity, and Grillo is plain anti-austerity. An apple, an orange and a banana.

Italy may have to go back to the polls in a few months, which thus means a few months of uncertainty. Or the constitution has to be changed, which won't be a simple process either. Again, if this were Australia, good luck.

Bersani was looking like a clear winner when the closing bells rang on European bourses on Monday night so last night provided the first opportunity to respond to the Italian stalemate. London fell 1.3%, Germany fell 2.3% and France fell 2.7%. The Italian stock market fell 5% and the Italian ten-year bond yield jumped 40 basis points to 4.9%.

Wall Street had already posted its weak response on Monday night and we recall that the first trigger of weakness in the rally came earlier in the month when the minutes of the last Fed meeting suggested the central bank was looking towards a QE3 roll-back. Last night Ben Bernanke, in his regular testimony to Congress, insisted the benefits of QE "are clear". He added that if no resolution was forthcoming to prevent the automatic budget cuts, which come into force after Friday, then no amount of QE could save the US economy.

Bernanke also praised the policies of printing-mad Japanese prime minister Shinzo Abe and dismissed any notion of a Currency War.

Rumours of QE3's demise have thus been exaggerated, as far as Wall Street is concerned, and that was a good enough reason for the buyers to come riding in again last night. Further reason was provided by some encouraging economic data releases.

The Case-Shiller 20-city house price index showed prices rose a seasonally adjusted 0.9% in December to be up 6.8% for 2012 ? the best year since 2005. The FHFA house price index of houses under Fannie/Freddie mortgages rose 0.6% (sa) in December and 5.5% for the year.

The Conference Board consumer confidence survey for the month was expected to show an increase to 62.3 from 58.4 in January, but it leapt to 69.6, with rising house prices cited as a fundamental driver. The Richmond Fed manufacturing index for the month showed a jump to plus six from January's disappointing minus 12.

To top it all off, late-season reporter and Dow component Home Depot, a beneficiary of the US housing recovery, posted a big earnings beat which sent its shares soaring up 6% in the session to ensure Dow outperformance.

Italy? Forgeddaboudit.

We recall that it was QE exit talk that pushed gold over a technical abyss recently and down into the 1500s. Gold has been grafting back ever since, including a jump on the risk implications of the Italian stalemate on Monday night, but Bernanke's testimony provided welcome relief for the gold bugs and the metal jumped US$18.90 to US$1612.50/oz last night.

On the subject of monetary policy, Aussie dollar traders must really be feeling giddy of late. Glenn Stevens opened his mouth last week to suggest rates were unlikely to be cut in the near term, while yesterday his assistant Guy Debelle delivered an address in Adelaide which, despite ostensibly being a benign lesson in central bank interest rate management, included the line "We still obviously retain scope to lower interest rates further, should the need arise, including to counterbalance the pressures of an elevated exchange rate". [See How The RBA Actually Sets Interest Rates]

The Aussie's been up-down-up-down all month and yesterday was another down-day on the strength of Debelle's offhand remark. The exchange rate is half a cent lower at US$1.0237.

The euro also saw its own Italian response on the Monday, so the US dollar index was only up slightly last night to 81.88. Base metals had closed early on Monday and may have been expected to tumble last night until the strong US housing data provided a reason not to. All are steady or slightly stronger. Spot iron ore is unchanged at US$151.90/t.

Brent traders, on the other hand, are more concerned about the implications for more weakness in Europe than any demand gains implied by strong US housing, hence Brent fell US$1.73 to US$112.71/bbl, and West Texas fell US61c to US$92.50/bbl. Crude prices are now at their lowest levels for 2013 (and Australian petrol prices are at their highest).

Australian stock traders will also be feeling a bit whiplashed, with the ASX 200 yesterday falling 52 points and the SPI Overnight closing up 29, or 0.6%.

Locally today we'll see some GDP sub-data in the form of fourth quarter construction work done, while a heavy day of earnings results will include AGL ((AGK)), United Group ((UGL)) and Westfield ((WDC)).

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