Market drivers

Thursday, October 28 2010

There are a few factors driving the market at present. The most prominent is speculation regarding the size and impact of quantitative easing. To us much of the trading seems speculative it is based on a belief that the quant easing will not have much impact on the US but will flow into and drive investment in emerging markets. Hence the strong buying in commodities, A$ and resources. Over the last 3 days we have heard everything from shock and awe decision (i.e. +$1 trillion) to likely to underwhelm (i.e. <$700bn). The bulls won on Monday and that had the market riled up, and now the bears are gaining momentum with their thesis that there is no need for big QE2 given: 1) manufacturing orders picking up, 2) China flexing its muscles on currency devaluation concerns, and 3) company profits picking up with 85% have beat this earnings season.

The sooner this speculation washes through the market the better as it will allow a focus on fundamentals. In this respect we note:

  1. US Reporting season has been strong as noted above. This is somewhat surprising given the softer economic data in July and August but is consistent with a recovering economy.
  2. M&A activity is picking up (Perpetual, ASX, Potash). We have been arguing for some time that we could expect a pick up and continue to see the deployment of corporate balance sheets as a key driver of activity and markets.
  3. Bank results have surprised on the upside to date. Banks are still lobbying to increase rates. We have been surprised they have not moved and we are more positioned for those banks which will benefit most (WBC and CBA). We still think a move is likely but if it is not done by mid November it will not be happening.
  4. Offset by some downgrades in the market especially for companies earning US$. We continue to receive feedback regarding a soft consumer and softer housing market. This feedback is at odds with most economists who continue to expect a consumer pick up and a pick up in interest rates. We think interest rates are on hold or should be on hold until after Christmas.  All the interest rate sensitive sectors are soft.  We will see next Tuesday whether the RBA agrees with us.

Separately Managed Accounts (SMA), Individually Managed Accounts (IMA) and Portfolio Management

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