Morning Note - Fed talks of winding back stimulus

 ** 30/03/11  - 9.08am  -  by James Gerrish** 

(Click to View Charts)       S&P/ASX 200  (Australia) -  Dow Jones Industrial Average (US)     -     FTSE 100 (UK) 
 

• Its certainly a resilient market at the moment and this was particularly evident overnight in the US
• We saw some data that came in below expectations for both housing and consumer confidence but I think the market is more focussed on the Jobs number later in the week. (Non-Farm payrolls due Friday). 
• There's a lot of talk about this number surprising to the upside and this makes traders very reluctant to be short stocks. 

• In the US last night, the DOW JONES added +81 points or +0.67% to close at 12279. 
• Locally, FUTURES markets are pricing in a rise of +27 points when trading kicks off this morning. 

• It was interesting to hear comments last night by James Bullard (St Louis Fed President) who came out and said the QE2 program (Bond buying stimulus) should be wound back early due to the current strength of the US economy. 
• I don't think will happen for a couple of reasons - I think the most obvious of which is they made this mistake with QE1 - they pulled the program early and the S&P 500 dropped more than 12% in the following few months and they had to launch QE2. 
• The Fed is now the biggest holder of US Treasuries and the main buyer of new Note Issues. They're monetising Obama's debts and need very ‘accommodative’ conditions to keep Bond Yields low. 
• Ultimately, the Fed will need to step out of the Treasury market and this is going to leave a massive void  - particularly when you think Japan is one of the top holders of US Treasuries – and they may need to be a seller to fund the rebuilding process. 
• We also saw the world’s largest Bond Fund (PIMCO), dump its holding of US Treasuries adding to the likely void in the market. 

• Why is all this important for equities in Australia? 
• I guess it’s most obvious for companies that will benefit in higher US interest rates - QBE in the main company here. 
• Its also likely to support stocks with high levels of US exposure, as interest rates will rise and you could argue that the US Dollar  will follow rates higher - after all, money tends to follow yield! 
• I don't think it’s as simple as buy the USD and go long companies with US exposure however this should be one of the themes we position ourselves for over the next few months. 
• To see some of my other INVESTMENT THEMES, CLICK HERE to view this weeks STOCKWATCH. 

James Gerrish 
(02) 9375 0117