(FRIDAY 28TH OCTOBER - JAMES GERRISH - 7.46am)...The DOW JONES added +339pts overnight while the S&P 500 put on +4.52%. European mkts were significantly higher (FTSE up +2.89%, German DAX up +5.35%, French CAC up +6.28%) while locally, the SPI FUTURES mkt is pricing a higher open up +59pts when trading kicks off here this morning.
Yesterday, the S&P/ASX 200 added +105pts or 2.49% to close at 4348.
DOW JONES - A massive relief rally overnight after the Europeans put forward a credible plan to manage debt and support struggling European nations. We'll touch on that shortly. Looking at the DOW, we highlighted the break out at the start of the week and it now seems the index is in a new trading range 11,600/700 - 12,600/700. Incidentally, the DOW JONES is set for its biggest monthly move since 1974 which actually happened during the 1973 to 1975 bear mkt in the States!
S&P/ASX 200 - When trading came back on line yesterday the Aussie mkt rocketed following the EU resolution. Technically, we smashed through the resistance level we'd highlighted all week which is clearly positive. The first higher high, higher low type structure has been put in the index which is the first sign of a trend change. So from the intra day low on the 4th October of 3840, the index is now up +485pts or 12.6% (and more to go today).
EUROPE - So the mkt pretty much got all it was after (for now)
1. Leveraged EFSF giving it fire power of 1 trillion euros so it has some type of backstop against other peripheral EU nations.
2. Greek Bond holders took a 50% 'voluntary' haircut on their holdings therefore not triggering a default event. This cuts Greek debt by 100 billion euros which they reckon is now sustainable. (even though its still 120% of GDP)
3. They will recapitalize European banks aiming for tier 1 capital of 9%.
So it ticked all the boxes for now but the implementation will be another hurdle to overcome. There is no doubting there is still some risk here but I think what has proven to be true is the determination in Europe to come up with a plan and I can;t see them stumbling during the implementation process.
RISK ON..... The charts below show one of the biggest risk on events I've seen in years. Whats most telling is the massive exodus from 'safe haven assets'.
Commodities Index
Australian Dollar
Volatility Index
US Dollar Index
10 Year Treasury yields - Pushing higher which indicates less demand for safe haven treasuries.
WHAT TO DO....
So its risk back on and we've got a situation where institutional investors are incredibly lite on in equities. The mkt has risen (so far) on low volume which indicates that it was just taking the path of least resistance - given the lack of sellers.
We now have the real possibility that money is going to flow back into this mkt as insto's have seen the rally of +12% from the lows and the 'fear of missing out' can come into play.
The bears will still question the resolution and point to the issues surrounding the implementation of the plan which is a valid point but one I wouldn't want to trade towards. The mkt trend is now firmly to the upside and it dangerous to go against that view.
We've been buyers of this mkt - not aggressively but we've been adding to positions over time + adding some new ones (including JBH + WES) at the start of the week.
I watched AMP's Shane Oliver on Switzer last night and he reiterated our view of things.
1. The mkt was pricing a US recession - the data suggests this is a myth
2. The mkt was pricing economic Armageddon in Europe - developments yesterday negate this call
3. The mkt was pricing a hard landing in China - we think it will be soft rather than hard landing and the data supports this.
Couple this with the strong company earnings in the States (72% of corp orates have beaten expectations in the States so far) and closer to home, the outlook for interest rates being cut next week and we can come up with a bullish outlook on things. Don't under-estimate it!
SOME TRADE IDEAS
Suncorp (SUN) - thanks Frank
Woodside (WPL)
Starpharma (SPL)
Wesfarmers (WES)
MODEL PORTFOLIO UPDATES
Buy Write - We bought back sold calls in ANZ, AWC, BHP, CBA & QBE.
AUSTRALIAN STOCK PRICES OVERNIGHT
In New York, News Corp rose by US$0.92 to US$18.09, equivalent to A$16.87, A$0.22 above its last close on the ASX.
ResMed rose by US$1.37 to US$28.63, equivalent to A$2.67, A$0.08 above its last close on the ASX.
In London, Rio Tinto rose 37.5 pence to £31.64, A$0.56 higher in Australian currency terms.
BHP-Billiton rose 140.5 pence to £21.09, A$2.11 higher in Australian currency terms.
Henderson Group Plc rose 2.5 pence to £1.09, A$0.04 higher in Australian currency terms.
