The Overnight Report: Obama Unmoved

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By Greg Peel

The Dow fell 185 points or 1.5% while the S&P lost 1.4% to 1355 and the Nasdaq dropped 1.3%.

The minutes of the last Fed meeting were released last night and they suggested that come the end of the year, the expiring Operation Twist would be replaced by an expansion of asset buying beyond the mortgage security bias of QE3. Given the Twist involves rolling out the maturity of the Fed balance sheet through selling shorter dated bonds to buy longer dated bonds, the implication of the minutes is that the selling part will cease but the buying part will stay.

We could look at such a policy as QE4, or perhaps just an extension of QE3. Either way, it implies a step-up in the level of Fed policy stimulus. Under normal circumstances, Wall Street would be thrilled to hear of the potential for more QE. But as the minutes were being released, President Obama was at the White House giving his first press conference since re-election.

Wall Street had already been weak in the morning session, carrying on the general theme of fiscal cliff concern but also reflecting a weak October retail sales number, impacted by Hurricane Sandy. The Dow flattened out through noon at down 50-60 ahead of the press conference but as soon as the president began answering questions, down it went again. Obama made it clear that his policy ahead of the election was to repeal the Bush tax cuts for high income earners, and on that policy he had been re-elected. Therefore the tax hikes were non-negotiable, as were the income thresholds of UD$200k (single) and US$250k (family).

This is not what Wall Street wanted to hear. It is not the tax hikes per se that is the issue ? everyone could reluctantly learn to live with them and move on. But that would require the Republicans in the House to agree to the hikes, and Speaker Boehner has, from the moment Obama was re-elected, said "no way". The Republicans will not support any form of tax hike, and that includes on capital gains and dividends, which are also in the frame. Uncertainty is the issue, and the real risk that a stalemate will send the US quickly into recession.

At this stage of the journey, there seems nothing to prevent the US going over the cliff. Other than, perhaps, an agreement from both sides to postpone the cliff legislation to allow more time for negotiation. The Dow is now down 600 points post election and 1000 points from the early October high.

A flash estimate released last night showed Greece's GDP contracting by 7.2% year on year in the September quarter, down from 6.3% in June and ahead of the new austerity measures passed by the Greek government which will further constrain any concept of growth. European officials fiddle while Athens burns.

Meanwhile a eurozone-wide day of austerity protest ended with rioting in Spain.

Japan appears to be moving towards a dissolution of parliament and the election of a new prime minister. Expectations are that a new government would step up attempts to cap yen strength with Japan's stepped up QE. In Britain, an update from the Bank of England struck a dovish tone which suggested it, too, would look to further step up QE. QE in one currency means the need for counter QE in another which implies more QE needed in the original currency and on and on we go. It would be interesting to contemplate what would happen if all the world's central banks agreed to coordinate.

Is there anything else we've forgotten to worry about? Oh yes ? the Middle East. News hit the wires last night that an Israeli airstrike on the Gaza Strip had killed the head of Hamas' military wing and the suggestion is the strike is just the beginning of a broader operation. First we bomb Gaza, then we bomb Tehran?

Altogether now: I see trees of green / red roses too / I see them bloom / for me and you / and I think to myself...

Brent oil jumped US$1.35 to US$109.61/bbl and West Texas US91c to US$86.29/bbl on the threat of escalating Middle East tensions while base metals were mixed and insignificant in London. Spot iron ore is up US10c to US$122.40/t.

With talk of QE all over the planet the US dollar index was unmoved last night and gold as good as, trading at US$1725.70/oz. But a funny thing happened in the Aussie. Despite everyone else devaluing their currencies the Aussie fell 0.6% to US$1.0373 which would suggest our currency suddenly has its old risk proxy hat back on. The US ten-year bond yield closed unchanged at 1.59% so last night's fears were all manifested in US stocks and the good old Aussie Battler.

The SPI Overnight closed down 42 points or 0.9%.

Graincorp ((GNC)) will report its full-year today while Myer ((MYR)) will announce first quarter sales.

The first estimate of eurozone

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