James Gerrish - Morning Note - Tuesday 17th August

 17/08/10   - 9.12am   -  by James Gerrish 

Current equity markets have an outlook of about 5 minutes at the moment making this Gold Fish a pretty accurate analogy of current investor psychology. Why? Because recent economic data out of the US has been below expectations and we're now seeing a revision down in growth forecasts. From my perspective, I don't believe this is new and anyone who has taken even a glancing interest in the US economy would realise that unemployment is still near 10% and this flows through to other measures - the main one being consumer spending. 



One aspect that I believe people underestimate is the level of cash on the balance sheets of Corporate America - We saw some tentative signs that capex spending was increasing (from recent reporting season) and this should play an important role in the slow (boring) recovery that we're seeing out of the States. 

But its important to look at the theme we suggest to invest towards - Avoid US/UK exposure - focus on emerging markets growth. A pretty important thing happened yesterday with China overtaking Japan as the second biggest economy in the world. To put this into context, China's nominal Gross Domestic Product for the second quarter totaled $1.337 trillion topping that of Japan at $1.288 trillion. Japan still has a higher annual GDP but this won't be the case for long. The total US GDP is $14 trillion (Australia is $925 Billion) and we're expecting China to become the biggest economy in the world by 2020-2030. This is HUGE..! 

Just across the ticker we had One Steel (OST) report above market expectations sighting a record profit out of Asia. We spoke about this theme in Coke's (CCL) results last week when the company showed significant growth from its Indonesian operations. 

On the market last night, looking only at the headline numbers would give a pretty anemic outline of market action. The DOW JONES lost -1 of a point or -0.01% to 10302. The FTSE added +0.66 of a point or +0.01% to 5276. It was important to note however that the DOW finished +94 points from the session low so a spirited recovery from early weakness did play out.  (Volume was the lightest YTD however) 

There was also a tentative move back into risk assets that have been sold down aggressively last week. Commodities bounced, the US Dollar fell and the Aussie found some support on a critical level of 88.5c. Gold continues to find support and we anticipate that Gold will retest recent highs around $1261.