(FRIDAY 10TH JUNE - 08.42 - JAMES GERRISH)..US Stocks had their first advance in 6 sessions last night as we finally got some economic data that was positive in the form of April trade deficit numbers. This was actually an important print and is a clear positive for second quarter GDP growth prospects.
The trade deficit narrowed on the back of export growth and reduced Oil imports. The DOW JONES added +75pts while the S&P 500 rose +0.74%. Locally, the FUTURES market is pricing a rise of +21pts when trading kicks off this morning.
Yesterday we saw the S&P/ASX 200 trade in a choppy band but finally finish 12 points higher. In the dealing room, we've noticed a phenomenon that has some quite freakish predictability - we've labelled it the 'Swanny Effect'. Each time Treasurer Wayne Swan speaks on TV, the market sells off. Yesterday we were up 20pts when he started speaking and were down 8pts when he'd finish - only to recover when he got off the soap box.
Another interesting aspect of last nights session was the trading action in the Euro. The ECB kept rates unchanged which was widely expected. Although I didn't hear the comments from Trichet accompanying the decision, seeing the Euro sell off means the market took it that interest rates may be kept on hold for longer in Europe. This is a positive for markets. We also had the BoE keep rates unchanged (no-surprises)
Commodities were also higher last night with Crude up more than 1%, Gold added $9, Softs were mostly higher and Copper was flat. We've seen a lot of concern about the slide in commodities of late with reports that the Global economy is falling off a cliff - headed for another double dip scenario. Have a look at the chart of the Commodity Index which tracks a diversified basket of raw materials and you'll start to see why I'm a little less bearish than most. We certainly haven't seen a any sign of sustained weakness hear (yet) and for now the price action remains positive. A word of caution - a break below the support line on the chart would be extremely bearish and I would want to reduce exposure to commodity producers.
The Volatility Index (VIX) which spikes when fear sets in is also pretty subdued at the moment - showing no real panic in the US. A break up above 20 would be a bearish signal and prompt a more cautious stance.
I'm certainly not suggesting to go out and BUY the market at current levels however I think that given the dominant market view is that we're headed lower in the near term, we may in fact do the exact opposite. I've been looking for a bounce in this market for some time now to see the characteristics of the bounce - this will be important. If a bounce occurs on high volume, then its got conviction and we may go on with it. If the bounce is on light volume, its got little conviction and is susceptible to a roll over.
If we do roll over after a bounce, the selling will probably be more protracted and it would be worth taking some insurance out against open positions.
As i've said before, I'm fairly comfortable having a min 30% cash in accounts at this stage. We're still invested in the market however we've got some ammunition for when valuations start to force our hand. That's how we construct portfolio's that outperform over time.
Not a lot happening in the region today other than Chinese trade data which comes out at 12. As we said yesterday, the main numbers out of China comes on Tuesday.
A word on yesterdays note....
I wrote the following comment yesterday "I've argued in recent notes that economic data zigs and zags (as shown above) and the trend is the most important thing to consider. I understand the trend has been firmly down however this weakness in the data suggests to me, we're nearer the place where we start to see an improvement rather than a continuance of weakness".
Allan asked me where I get my confidence about a change of trend in the data.
The main aspect of the chart above, and I should have been clearer yesterday, is that it measures economic data against expectations which is what the market really cares about. Stocks go up or down based on the data print v expectations.
Invariably, when we get a string of poor numbers, expectations get ratcheted back. We saw this last week when got export data that was poor and this prompted a ratchet back of GDP expectations. Anyway, the point is, expectations get lowered so we have more of a chance of meeting them and actually exceeding them as things improve which has a positive impact on the market.
AUSTRALIAN DUAL LISTED STOCKS
In New York, News Corp rose by US$0.16 to US$17.42, equivalent to A$16.40, A$0.13 above its last close on the ASX.
ResMed fell by US$0.06 to US$30.94, equivalent to A$2.91, A$0.02 below its last close on the ASX.
In London, Rio Tinto rose 52.5 pence to £42.00, A$0.81 higher in Australian currency terms.
BHP-Billiton rose 29.5 pence to £23.25, A$0.45 higher in Australian currency terms.
Henderson Group Plc rose 0.4 pence to £1.42, A$0.01 higher in Australian currency terms.
