Morning Note - New World Economies the place to be

by James Gerrish 11 October 2010

**11/10/10  -  8.27am  -  by James Gerrish** 

On Fridays note we wrote "The non-farm payrolls number is out in the US tonight. This is a big number and the market will be firmly focussed on it. What this number means however maybe somewhat different this time around. If the number is positive, this may reduce the likely hood of further quantitative easing which could ultimately be a negative for the equity market. If the number is bad, this would give further support for another round of Quantitative easing which is supportive of equities.  This is a bit upside down but may be the case tonight."

The jobs report was disappointing yet we saw the equity markets rise. As we suggested on Friday, poor labour market data heightens the chance of further stimulus which is a positive for stocks and bearish for the USD. From a technical standpoint, the three wave pattern in the US Dollar Index (measures the USD against a basket of other major currencies), is suggesting a decline to 75 which is about 3% below current levels. This would force the Australian Dollar above parity. 
 

I'd hazard a guess that if this does play out as we suggest, then we may see some bargain hunting come into the USD and a short term pullback in risk assets (which would present a buying opportunity). The market is really driven by the USD at the moment and although I'm bearish on the Greenback, its unlikely to continue its slide uninterupted.  Short term factors (such as positive US company earnings) may offer some support for the greenback. This is something we need to be conscious of however at the moment its all green for the short USD, long commodities, long equities trade. 

To give you some context of the state of the Australian economy v the US economy, we saw last week that Australia added +50,000 jobs in September from a population of 22 million people. On Friday, the US added none (actually lost 95,000) from a population of 350 million. Thats why we've been pushing the New World (Emerging Markets Trade) avoiding exposure to the developed "Old world economies". 

The US has flagged its intention to print more money while interest rates remain near zero. Japan lowered its interest rates last week from 0.1% to 0% ( not sure if that will have a major impact) and outlined plans for significant purchases of their currency. Europe Sovereign debt issues still remain high which is highlighted by soaring prices for Credit Default Swaps. 

Contrast this to Australia that came very close to an interest rate rise last week (and is odds on for another 0.25% rise in November), The Asian region that has growth of 6%+ and Latin America that is out shining  its northern neighbors. Invest in companies with New World exposures... Avoid companies with exposure in Old world economies. Thats been our key investment theme for the past 5 months and continues to be so.  

On the market on Friday, the DOW JONES added +57 points or +0.53% taking the benchmark above 11,000 to 11,006. In London the FTSE 100 lost -4 points or -0.08% to close at 5657. Locally, SPI FUTURES are pricing in a rise of +22 points this morning. 

Disclaimer

James Gerrish is an Authorised Representative (Rep No. 352904) of Shaw Stockbroking Limited ("Shaw Stockbroking"). Shaw Stockbroking is a holder of Australian Financial Services Licence No 236048. Shaw Stockbroking, its directors, officers, associates and employees each declare that they, from time to time, may hold interests in financial products and/or earn brokerage, commission, fees or other benefits from financial products mentioned in this e-mail or attached documents. Unless specifically stated within this page or an attached document, any information communicated by this e-mail constitutes unsolicited general financial product advice which has been compiled without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you need to consider the appropriateness of this information having regard to your individual objectives, financial situation and needs and consult your adviser. Any indicative information and assumptions used here are summarised and also may change without notice to you, particularly if based on past performance or relate to a future matter.
 

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