Morning Note - Stocks rise ahead of Mid Terms

Stocks rose in the US and Europe overnight ahead of the US mid term elections and FOMC meeting which will decide on the level of Quantitative Easing (QE) to be injected into the system. To put this into context, a report by CNBC overnight concluded that a $500 billion package would be equal to an interest rate cut of about 0.50% in the official cash rate. Contrast this to the Australian Economy which the RBA believed was strong enough to cope with another rate rise yesterday of 0.25%. This significant interest rate differential is what's driving the Aussie Dollar higher against the greenback and from my perspective, will continue to be supportive of our local currency in the years to come. 

In the market overnight, the DOW JONES added +64 points or +0.58% to close at 11188. In London, the FTSE 100 added +62 points or +1.1% to close at 5757. Locally, the SPI FUTURES were suggesting a rise of 13 points when trading kicks off this morning. 

The USD dollar pulled back overnight  and this was supportive of the commodity markets as shown by the Commodity index  The Dow Transports which is often used a leading index in the US was also strong adding +1.3%. This is important as it tracks transport stocks which give a strong indication of the level of goods moving around the US. 





The rate rise yesterday was a surprise to me and the majority of the market - although when you look at the trend, yesterdays move was the fifth consecutive move on Melbourne Cup day. We also saw an interest rate hike in India overnight as it attempts to manage inflation. So when we sit back and look at the markets, we've got the US effectively reducing rates to try and stimulate expansion while European markets are clearly still under pressure. Contrast this to China that recently raised rates to manage growth and India did the same overnight - Australia is riding on these coat tails.  

Its clear to me what theme we should be investing towards. Invest for emerging markets growth - the NEW WORLD economies and avoid companies with exposure to developed nations. This is our suggested investment theme and over the last 6 months or so, its been performing well. This is shown in our EMERGING GROWTH MODEL PORTFOLIO. 

Westpac announced its result this morning and from an initial look - it appears fairly strong. One important consideration however is that growth was supported by their institutional divisions while retail actually contracted. The claim that banks are feeling the pinch on margins was also evident in the result (or more so in Westpac's than others), and this goes some way to explain the additional increase (above 0.25%) by CBA yesterday. We expect the other banks to fall in line today possibly at lesser levels and this is going to cause a political storm. I've been watching the head of the Bankers Association explain CBA's move - I'd hate to have his job this week. 

Big night in the States tonight with the US going to the polls.  

By James Gerrish