Morning Note - Middle East Tensions continue

by James Gerrish 22 February 2011

** 22/02/11  - 8.57am  -  by James Gerrish** 

  • The local market was lower yesterday, dropping -41 pointed or 0.84% to close at 4900. This came on the back of a 2 week rally that saw stocks 3.7% higher. 
  • It now appears that some short term weakness may be coming into play based on 2 factors.
  • 1. Increased reserve requirement ratio from China - another step to tighten policy in China prompted some selling in the miners yesterday 
  • I actually think this is a positive step - shows China its managing its inflation issue by gradually tightening policy - the gently gently approach is what we're looking for and I think at this stage, it’s what we're getting. 
  • We're going to see continued steps to manage inflation so it shouldn't really come as a shock for the market. I think its often used as an excuse to sell but that’s about it - expect China to continue to tap the brakes. 
  • 2. Increased political and social unrest in the Middle East - this sent the Oil price spiking last night while GOLD and SILVER also rose strongly. CHECK THE CHART OF OIL - IMPRESSIVE MOVE! (Biggest in more than 2 years) 
  • Remember what happened in Egypt - there was a knee jerk reaction by the market when instability there was escalating but ultimately, that proved to be a strong buying opportunity more than anything else.
  • Last night, the DOW JONES was closed after rising +70 points on Friday. 
  • In LONDON, THE FTSE 100 was down -68 points or -0.12% to close at 6014
  • We've spoken about Inflation many times this year and its going to be a common theme throughout 2011 and beyond. 
  • This has really been one of the underlying reasons for such unrest in the Middle East - rising food prices and cost of living pressures has prompted action. This of course is only one aspect of a broader problem but does show the interrelationship of global markets. 
  • There is no doubt Inflation is a concern - so what should investors do in an inflationary environment?? HOLD PHYSICAL ASSETS such as Commodities! 
  • I continue to hear that we're in a commodity bubble and the historical trends show that prices that rise strongly (as they have) will also pullback sharply.
  • My issue with this view is that past trends are being extrapolated out to the future when our current situation has no historical precedence.
  • Urbanisation and Industrialization in emerging market is supporting physical demand.
  • Super loose monetary policy around the globe which has been designed to inflate prices (or at least to stop deflation) will ultimately lead to some degree of inflation - which is supportive of commodity prices.
  • Thirdly, investment in large scale commodity projects went on the back burner during the Financial Crisis, so we've got some supply side constraints as well.
  • All in all, I think this is pretty positive for commodity markets particularly if the US hold fire  tightening policy which will keep the USD under pressure.
  • The FUTURES MARKETS are pricing a slightly higher open today (+3 POINTS) however I think this might be a little optimistic.  
James Gerrish 
(02) 9375 0117

Disclaimer

James Gerrish is an Authorised Representative (Rep No. 352904) of Shaw Stockbroking Limited ("Shaw Stockbroking"). Shaw Stockbroking is a holder of Australian Financial Services Licence No 236048. Shaw Stockbroking, its directors, officers, associates and employees each declare that they, from time to time, may hold interests in financial products and/or earn brokerage, commission, fees or other benefits from financial products mentioned in this e-mail or attached documents. Unless specifically stated within this page or an attached document, any information communicated by this e-mail constitutes unsolicited general financial product advice which has been compiled without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you need to consider the appropriateness of this information having regard to your individual objectives, financial situation and needs and consult your adviser. Any indicative information and assumptions used here are summarised and also may change without notice to you, particularly if based on past performance or relate to a future matter.
 

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