**01/10/10 - 7.23am - by James Gerrish**
It was a pretty volatile session in the US overnight with a tussle between traders looking to lock in profits at quarter end and better than expected economic data. Business Activity came in higher than we anticipated in September exceeding even the most optimistic estimates - this prompted a rally in the Crude Oil market.
We also saw the number of applicants for unemployment insurance fall last week. These are positive numbers but weren't enough to push the market into positive territory by the close.
The DOW JONES finished the session down -48 points or -0.44% to close at 10788. At its best the index was up +113 points - at its worst it was down -90 points. Interestingly, Reuters published a report yesterday showing that institutional investors increased equity holdings to the highest level in 3 months in September pulling money from more defensive assets such as Bonds & Cash. From what I see in the Bond market, it doesn't seem that a lot of money has been flowing out given yields are still at historically low levels - around 2.51% for the 10 year note.
In London, the FTSE 100 closed the session down -20 points or -0.37% to 5548. Locally, the SPI Futures contract was suggesting a slight recovery this morning of +6 points.
Our market was savaged yesterday particularly on the close where the index dropped 20 points as we saw larger sell orders come in at the death. This could have been from international investors (given the size of the orders) squaring up books at month end. You can hardly blame them. The S&P/ASX 200 added roughly 7% for the three months ending 30th Sep. Couple this with a rise in the Australian dollar of 15% over the same period against the Greenback and you've got offshore fund managers booking profits of +22% - just for following the index. Not a bad result.
Looking at what could drive the market moving forward, we've got manufacturing data out of the US tonight with the monthly national factory index due for release - the forecast is for a drop down to 54.5 which would be the weakest level in 10 months. Next week we see the September Jobs report which is going to be the main focus ahead of US company reporting which starts in the middle of October.
Towards the end of October we also see China release its 5 year plan for growth and this is something that we'll be watching closely. Never before has the fate of the Australian economy been so tightly linked to China (and other emerging markets) and this 5 year plan will give insight into their priorities (likely to be focussed on driving domestic consumption) and expectations for base line growth moving forward. (exp 7.5%)
On the local market, I think its prudent to be cautious at the moment. I wouldn't be surprised to see some weakness coming into the fold in the next two weeks ahead of the US reporting season. Any weakness however is likely to be supported and this is where we like to pick up stocks that are exposed to our Key Investment Theme - the growth in emerging markets.
