Morning Note - Stocks drop despite strong economic data

                                                                                                                                                                                ** 02/03/11  - 8.15am  -  by James Gerrish** 

• Stocks in the US were sold down sharply last night based on a couple of factors
• 1. Escalation of Middle East tensions as the crisis threatened to spread into Iran. We also saw Gaddafi give his first TV interview yesterday and I guess it gave an insight into this strange character.
• It unsettled me when I heard his rant and from the price action last night, it seems I wasn't alone.
• 2. This sent Oil prices more than 3% higher which refocussed attention back on the economic impact of a spike in Oil prices for the US economy.
• 3. Benanke spoke overnight and gave a pretty confusing message. He said that higher oil prices would impact economic growth and price instability but it would be mild and only have a short term impact. He later said that high prices for any sustained period of time could have an impact on the recovery and is inflationary.
• He was then more downbeat about inflation (and ultimately growth) and more concerned about jobs - suggesting that stimulus would remain in place as the economy still needs it. 
• He later downplayed any further stimulus measures being rolled out! 
• So with Benanke's somewhat confusing comments last night and Govenor Glenn Stevens comments yesterday (which both downplayed the threat of longer term inflation) – you’d suggest it was a more sombre assessment from both Central Bankers.

 

• Overnight, the DOW JONES lost -168 points or -1.38% to close at 12058
• In London, the FTSE 100 lost -58 points or -0.97% to close at 5935. 
• Locally, SPI FUTURES are pricing a drop of -58 points when trading kicks off this morning.

 

• I was actually a little bit shocked to wake up this morning and see the market sold off so aggressively after a run of stronger economic data in Europe and the US.
• 1. Data showed US Manufacturing grew at its highest pace in almost 7 years according to the Institute of Supply Mgt last night. 
• 2.UK manufacturing continued to grow at its fastest pace in at least 19 years + house prices actually rose.  This sent the Pound to its highest level against the Greenback since January 2010. 
• 3. There is even talk about interest rate increases in the UK (but I suspect this is a some way off) 
• 4. German PMI data was also positive 

• Generally these numbers would have supported a rise of +1% or so but this didn’t happen overnight – market focussed more on Macro issues!!
• Still, its best to look at the flow of money and we certainly saw a move out of risk last night. Money flowed to Treasuries, Gold, Silver & Oil and out of anything that is leveraged to growth.

• Looking at the S&P 500 from a technical sense (SEE CHART), we're still above the recent low however I'm now a little concerned that we may have just put in the first lower high. 
• This is typical of a change of trend and although we need to see a break below the recent low for confirmation, the nature of the selling last night puts me on edge. 1300 is a key level of support 
• We'll give the market some time to settle this morning before making any decisions. 

 

• Stocks trading overseas
• In New York, News Corp rose by US$0.06 to US$18.40, equivalent to A$18.07, A$0.21 above its last close on the ASX.
• ResMed rose by US$0.14 to US$31.60, equivalent to A$3.10, A$0.01 below its last close on the ASX.
• In London, Rio Tinto rose 44.0 pence to £43.10, A$0.70 higher in Australian currency terms.
• BHP-Billiton rose 18.89 pence to £24.51, A$0.30 higher in Australian currency terms.
• Henderson Group Plc fell 1.1 pence to £1.61, A$0.02 lower in Australian currency terms