Our market was sold off yesterday after GDP data from China showed the country still powering along at growth of 9.8%. This refocusses attention back on inflation concerns and the measures China will need to take to handle rising prices. I think the fact that China raised rates late last year and increased reserve requirement ratios a number of times and we're still seeing high growth figures has the market a little concerned - prompts the question of how far will China need to go to manage growth??As I've said before, I'm pretty confident that China will be effective in managing inflation and growth will settle rather than crumble.
This is putting some pressure on commodity prices which has prompted the short term weakness in our market however - I do think it is going to be short term weakness rather than a more protracted downturn. It is important to look at price action of the major markets so lets go around the grounds.
There is some concern about Gold at the moment and although I'm a longer term bull on the price of bullion i'm not topping up on Gold until it finds support. I'm not interested it trying to pick a bottom in the price of an asset whilst its falling - more often than not you'll buy and it will continue to fall.
CHECK THE GOLD CHART HERE - This is obviously putting pressure on Gold stocks particularly Newcrest Mining (NCM) - I still believe its worth holding for longer term investors however I'm conscious that we may feel some shorter term pain.
Crude Oil is also in focus and will remain so whilst ever there is concern that China will tighten policy too aggressively and growth will slow. I don;t buy into this theme and I believe that continued growth from developing countries will be supported by a recovery in the US and higher prices will come. Higher prices in Crude is certainly not a positive for economic growth however short term drivers of growth and continued pressure on the USD is likely to be supportive for Crude -
CHECK THE CRUDE CHART HERE
One of the interesting themes we're seeing at the moment is a sharp reduction in shipping costs. This is shown by the Baltic Dry Index which measures bulk freight rates on the daily basis. Previously, we used this index as a strong leading indicator of underlying economic activity (i.e - if freight rates were rising there must have been significant demand to ship goods around the world
CHECK THE BALTIC DRY INDEX CHART. This no longer holds water given the oversupply of ships that are coming online - so its lost its appeal as a leading indicator.
One that I still like is the Dow Transportation Index (Dow Transports). It tracks the Transport stocks on the Us market and shows the level of good moving around the world largest economy. It can often lead the Dow Industrials
CHECK THE DJT CHART HERE
Looking more closely at the local market as shown by the S&P/ASX 200, it seems like we may have had a false break above 4800. I'm a little more optimistic that others that look at charts and I'm encouraged by the support that was recently put in place at 4700. We can comfortably drift between current levels and 4700 before I would get negative short term.
CHECK CHART OF XJO HERE . We need break back up above 4800 with some conviction if our call to 5000 in the short term is still in play. Next couple of days critical here.
Have a good weekend
