02/08/10 - 6.37am - by James Gerrish
The market finished flat in the US on Friday and given we've got a bank holiday here today, trading is likely to be thin - probably best to head to the snow looking at the large dump they got last night!
It was interesting to see that Manufacturing data out of China was the weakest in 17 months confirming a slow down was occurring. The Chinese Government has taken steps to dampen the over exuberant housing market, increased the capital requirements for banks (to reduce liquidity) and have clamped down on energy intensive factories all in a quest to pull growth back to manageable levels.
Although it seems to be working (if you look at PMI data), the Chinese Equity Market has bounced which suggests that domestically, investors are becoming more confident that growth will remain strong.
On the Fridays session, the DOW JONES lost -1 points or -0.01% to 10465. In the UK the FTSE 100 fell -55 points or -1.05% to 5258. Locally, SPI FUTURES were indicating a rise of 7 points when the market opens.
Over the last couple of weeks we've been discussing the move out of defensive sectors into riskier asset classes. This move has been obvious with the Volatility Index down, the Commodity Index sharply higher on the back of buying in Base Metals such as Copper. In the currency markets, we've seen a pullback in the US Dollar and the Japanese Yen while buying has intensified in the Aussie Dollar and the Euro.
This points to a distinct move into more growth orientated asset classes and you'd assume this is on the back of US company results. It shows that investors are upbeat and are willing to rotate back into some risk. Even on the couple of down days last week, it was the defensive sectors such as healthcare that weighed the market.
Looking more locally, our market is continuing to under perform both the US and UK. The US is now marginally higher for the year while the S&P/ASX 200 is down more than 7%. This shows that measures to reduce growth such as interest rate hikes are weighing on investors and given the downside surprise in CPI data last week, I would argue that we're likely to see inaction from the RBA - potentially for the rest of the year.
Another interesting observation is the under performance of the S&P/ASX 200 against the Aussie Dollar. There is generally a high degree of correlation which has recently faltered.
I'm suggesting more upside in the market leading into reporting.
