Morning Note -

Two sessions in overseas markets took place while we were off enjoying Australia Day celebrations. In the US on Tuesday some early weakness was followed by a strong afternoon rally which was supported by another positive session overnight. 

Economic data continues to impress with data on New Home Sales surging last month. The actual underlying figures were very positive however it was probably a direct result of a tax incentive by California  which gave up to 10k rebates for new houses bought by the end of last year. This would have distorted the number and should really be discounted. 

The reality is the housing market is one of the main aspects of the US recovery that continues to lag. We're not likely to see much improvement without an uptick in employment and this comes on the back of US corporations having the confidence to hire. I certainly believe this will come and we saw the first signs of confidence in the corporate sector last week with GE reporting a strong rebound in large equipment sales to US companies.

On the market last night, the DOW JONES was trading +20 points just before the close around the 12000 level. In London, the FTSE 100 had a positive day adding +51 points or +0.87% to close at 5917. Locally, SPI FUTURES were suggesting a rally of 31 points however we did drop a little the night before so maybe +15 points is a better indication.  The US dollar tracked lower while commodities were broadly higher. 

One of the themes that we do need to be conscious of at the moment is the anxiety over Chinese Growth. From my perspective I think the emphasis on inflation coming out of China is a little overblown. For now, growth remains strong and we even saw a tick down in inflation last month. 

In saying this, it would be foolish to discount the markets obvious nerves surrounding stocks that have rallied hard and are directly exposed to Chinese data. From a psychological perspective, if you;re sitting on a mid cap miner that has rallied +30% and there is the potential for China to rattle the boat, you're tolerance to withstand the normal market volatility is likely to be low. 

We saw this at the end of last week when some selling came into the market and small/mid cap stocks were sold aggressively. For those that are comfortable will risk, then I think the potential MA in the resource space will see stocks higher near term, however Its likely to be a rocky ride. If you're in solid profit, it may be a prudent to reduce exposure short term by either reducing the size or number of holdings that would be effected by a tightening policy bias in China. 

A positive start to the session this morning with Options Expiry adding to volumes.

James Gerrish
(02) 9375 0117