James Gerrish - Morning Note

 

04/08/10   - 9.03am   -  by James Gerrish 

A night of consolidation in both the UK and US markets overnight after the strong rally on Mondays session. It was encouraging to see that the Material stocks - which led the rally the previous session finished flat (i.e no selling pressure) even with some slightly disappointing data on factory orders, pending home sales and consumer spending. We expect risk assets to stay in focus over the coming months which could provide us a real opportunity - for the medium term at least.

The biggest threat to this theme is employment data from the States (non farm payrolls due Friday). Employment is critical to give domestic consumption a boost. Domestic Consumption accounts for 70% of US GDP compared to 55% in Australia and just 35% in China. This highlights the importance of getting the US consumer spending again and it all stems from growing employment. We've started to see an improving trend with unemployment steady and over the next few months we do expect this will start to improve (i.e employment growth). I spoke yesterday (Sky Business) about the sustainability of this move into risk assets and I do think it has legs - A lot longer legs if US employment continues to improve. 

Overnight, the DOW JONES lost -38 points or -0.36% to 10636. The FTSE 100 lost -0.63 of a point or -0.01% to 5396. Locally, the SPI FUTURES were relatively flat down just -4 points. 

If this theme into risk assets is set to continue, and we believe it will, another way to play it is through the mining services companies such as Worley Parsons (WOR) or peripheral exposures such as West Australian News (WAN) - WAN reports tomorrow so hold fire until them. These stocks have lagged the aggressive move into the miners and could offer a cheaper entry into the theme.