Morning Note - Benanke spooks the market

The Federal Treasurer in the US, Ben Benanke spoke last night about the uncertainty in the market at the moment and unsurprisingly, these comments prompted traders to hit the sell button. "Unusually Uncertain" is how he phrased it in a prepared statement which also confirmed that policy makers in the US were ready to pull the trigger on more stimulus if the need arouse. 

As we said last week, its a real tussle between Macro and Micro issues at the moment. We're seeing strong company reports on the whole with 82% of the companies that have reported so far beating earnings expectations - we're just seeing some marginal weakness in revenue which to me is understandable given the current phase of the recovery.  

On the Macro front, economic data has been mixed at best and we're now seeing policy makers react this this change in trend - still, I think this is fairly normal and data will remain lumpy for quite some time. This supports our view that we'll see a market trade in a defined range over the next 12 months - broadly between 4000-4800 on the S&P/ASX 200. 

I read a note this morning from UBS which discussed the overly pessimistic view of the Australian market.   Currently the market is trading on froward P/E of 11.5 times (20% below the 20 year average). Although I do expect some downgrades to consensus forecasts for the S&P/ASX 200 in the coming weeks/months, I still think we'll see stocks trade closer to PE averages. 

I'm not as bullish as UBS which has a year end target for the index of 5250 however I do support their reasoning. For the market to hit their target, it still assumes below trend P/E of 13.5 times based on current consensus earnings - so not out of the question by any means. 

This ties back in the tussle between Macro and Micro issues. Companies look attractive at current levels however the broader economic uncertainly as Benanke eluded to last night is our main concern particularly Europe.  

Last night, the DOW JONES dropped -109 points or -1.07% to 10120. The FTSE 100 added +75.18 points or 1.46% to 5214. Locally, SPI FUTURES are pricing a drop of -49 points on the open to 4349.