(THURSDAY 14TH JULY - 08.33 - JAMES GERRISH)....A volatile night with the DOW JONES up +160 pts early after Benanke suggested QE3 was still an option. Focus then switched to the US debt ceiling and this stoked the jitters again - The Dow dropped more than 120pts to close the session up +44 pts.
After market we saw Moody's (rating agency) put the U.S on review for a possible downgrade and this sent the Futures market sharply lower (-70pts on the Dow Futures). It was a knee jerk reaction and we've seen the Futures bid higher since then however its likely to be a negative open when trading kicks off here. Our Futures are up +2 but I think this is a little optimistic.
Yesterday, the ASX 200 finished the session higher (+19pts) after some positive numbers out of China. GDP came inline with expectations with the economy still growing at 9.5% while Industrial Production was stronger than expected. This gives evidence that China (for now at least) is not coming back to earth with a thud - tightening measures are not stifling growth and China is more likely to experience a measured slow down than a dramatic fall from grace as some have been suggesting.
MOODY'S DOWNGRADE
The Ratings Agency has put the US on negative credit watch overnight and this follows a similar call by Standard and Poors back on the 18th April this year. In April, it caused a sharp, short term reaction but much of the commentary was along the lines of...."whats new". We know US debt is a large issue (93% of GDP) and there is time pressure around the debt ceiling being raised (by August 2). Couple this with European issues and we get a nervous market. Before yesterday, we also had concern that China was slowing more dramatically than expected when in fact, Industrial production has actually accelerated (rising 15.1% yoy against 13.3% in May) - so yesterdays data at least takes one concern out of the equation.
In relation to the US debt ceiling, history suggests that this will be raised. In all years between 2001 and 2007 the debt ceiling was increased - in fact, we've seen it increased more than 60 times in recent history and when we take a look at the future debt profile of the US, it won't be the last time we'll have this discussion.
Ultimately, I think there are three things putting pressure on the market.
1. US Debt Ceiling
2. China slowdown
3. European Debt
My view is that points 1 & 2 will sort themselves out. The European debt issues are more complex are will take more time. The outcome here is a little more uncertain but it seems the EU is intent on putting a bandaid over the problem or at least ensuring an ordered default. Even an orderly default will have its consequences however it will be far more painless than a disorderly default like Lehmans Brothers.
AROUND THE GROUNDS LAST NIGHT.....
The USD was trollied on the rating agency concerns and we saw the Dollar Index sold pretty sharply
This prompted buying in the Euro and this now sets up a pretty interesting setup for those looking to short the Euro. As I said above, I think the major concern in the market at the moment is in Europe - that US concerns will be managed so this supports the SHORT EURO trade against the Dollar. Now its come back and retested the last breakout area, this looks a pretty attarctive entry point.
When ever we get talk of printing money, hard assets seem a lot more attractive. This was the case overnight with Commodities bid higher. Looking at the CRB index below, its now threatening to break the last swing high we've highlighted before. A break of 351 (close basis) would be bullish.
Gold was a stand out overnight and its certainly benefiting from market uncertainty + talk of QE3.
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp rose by US$0.28 to US$16.36, equivalent to A$15.21, A$0.47 above its last close on the ASX.
ResMed rose by US$1.80 to US$32.15, equivalent to A$2.99, A$0.03 above its last close on the ASX.
In London, Rio Tinto rose 52.5 pence to £44.41, A$0.79 higher in Australian currency terms.
BHP-Billiton rose 39.24 pence to £24.41, A$0.59 higher in Australian currency terms.
Henderson Group Plc fell 1.0 pence to £1.54, A$0.02 lower in Australian currency terms.
