(THURSDAY 15TH SEPTEMBER- 08:32 - JAMES GERRISH)...It was a pretty strange afternoon yesterday with the Aussie MKT falling -66pts after the morning session looked promising (+30pts). Some suggested the downgrade of second quarter CPI was to blame (hence the drop in the Aussie Dollar) while I thought the Asian Development Banks revised outlook for Asia/Pac growth (down) was probably more relevant as were the comments by the Chinese Premier Wen Jiabao
"The governments of all countries must truly shoulder their responsibilities and deal properly with their own affairs," Wen said in an opening speech, which did not single out any nations by name in the comments on the debt crisis.
"The major developed economies must adopt fiscal and monetary policies that are responsible and effective, and appropriately deal with debt problems, ensuring the secure and stable operation of investment markets," said Wen.
Anyway, we got belated news that Moody's had downgraded some French banks so that probably explained the bulk of the move toward risk aversion even though it was a situation we'd heard about over the weekend. You'd put it down to a complete overreaction from Australian investors yesterday and those that sold into the perceived panic will be regretting it today.
Overnight, we saw stocks rally with the DOW JONES closing up +140pts (it was up 280pts about 30 mins from the close) while the S&P 500 added +1.35%. European mkts were also better off after Sarkozy (French President) and Merkel (German Chancellor) expressed support for Greece while for its part, Greece agreed to push forward with the already agreed austerity measures.
I was also up listening to Timothy Geithner (US Treasury Secretary) speak at a CNBC conference last night and a couple of his comments were pretty telling. We posed the question in yesterdays note of whether we are expecting another Lehman type scenario.... timely as Geithner unequivocally stated "There is no chance that the major countries of Europe will let their institutions be at risk in the eyes of the market"... while he went onto say that German Chancellor Angela Merkel has stated a number of times that "we are not going to have a Lehman Brothers..." and that Europe (I guess he really means Germany) has the fire power to manage the current situation.
I don't think the mkts as sure as they seem to be but the comments were taken as a positive non-the-less.
There is little doubt the focus will remain on Europe with a number of key meetings taking place early next week. From a markets perspective I think the main piece of news flow that we'll be watching for will be centered around the roll of the European Financial Stability Fund and whether we see moves by member nations to beef up its reserves.
The fund has access to about 440billion euros but most predict they would need about 1 trillion euros to manage the unfolding mess. Any move to expand the capacity of this facility will be a major positive and catalyst for a rally.
We also have the Fed Reserve in the US meeting at the end of next week with an extended 2 day meeting taking place. There will be hope of further stimulus being announced and I think traders would be reluctant to hold short positions going into that meeting. This should offer support to the market next week.
My View
Remains the same as I've been suggesting for a while. Market lows form during the height of bearishness. They can be choppy and we can re-test that low point a number of times. We can even make a marginal new low but ultimately, that improves the validity of the base.
At this stage, I think the mkt is pricing in too much negativity and this presents the opportunity for some good news to underpin an aggressive rally. The catalysts could come next week.
MODEL PORTFOLIO UPDATES
We added a position in Haranga (HAR) yesterday in the Emerging Growth Portfolio.
AUSTRALIAN DUAL LISTED STOCKS
In New York, News Corp rose by US$0.02 to US$16.33, equivalent to A$15.92, A$0.37 above its last close on the ASX.
ResMed rose by US$0.12 to US$29.50, equivalent to A$2.88, A$0.07 above its last close on the ASX.
In London, Rio Tinto fell 17.0 pence to £35.30, A$0.26 lower in Australian currency terms.
BHP-Billiton fell 3.0 pence to £19.49, A$0.05 lower in Australian currency terms.
Henderson Group Plc rose 2.5 pence to £1.21, A$0.04 higher in Australian currency terms.
