Morning Note - The Stars Aligned

23/7/10   - 8.06am   -  by James Gerrish 

 

The stars finally aligned overnight and we saw the combination of strong company earnings with better than expected economic data after reports showed that US home prices actually rose. 

This sent the DOW JONES up strongly ending +201 points or +1.99% to 10322. Over in Europe, there was data out that showed manufacturing and the service sector was in better shape than anticipated and this prompted strong buying across all major European markets. 

The FTSE 100 ended +99 points or +1.90% to 5313. Interestingly, it has just broken to the upside of resistance and looks quite strong. Locally, SPI Futures were matching 64 points higher. 

We spoke yesterday about the tussle between Macro and Micro issues and today’s results certainly doesn't mean that this tussle is over. Economic data will continue to be mixed and we'll see volatility in the market going forward - but the theme that companies are growing earnings more than expected and are still trading on multiples well below historical averages will provide some confidence. 

I actually think that confidence is the major thing missing in the market at the moment and once this returns (which it will) - we'll have better times ahead. If we think about it on an Australian level, international investors pulled out of our market when the Resource Tax was first announced. At that time I wrote that the biggest mistake the Rudd Government made was under estimating the implications from a change in perception of the Australian market from international investors. Since then, we've had a change of leader, an election announced, a  change to the tax and this continues to ad uncertainty in the minds of international investors. 

We have seen signs that they're coming back - the takeover offer for Centennial Coal (CEY) from Thai based Banpu is a sign of this, however there is still a level of 'What if' tied to an Australian investment - we call it risk premium. 

My view is that when Australian companies start reporting next month, we’ll see strong results and couple this with the certainty (one way or another) of an election and we'll start to see international money flow back into Australia. Why would have they done it before now when they could hold fire and see how the cards settle? 

A positive day on the local market to end the week.