East versus West

Global growth is a story of contrasts between east and west. In China, the problem is too much growth and how best to cool the economy without dousing the fire too much. In the US and Europe, the approach is diametrically opposite with not enough growth and worries about falling back into recession, particularly in the US.

The US Commerce Department data reported that the US economy grew 2.4% in the second quarter of 2010 after upwardly revising the first quarter growth to 3.7%. That makes four consecutive quarters of growth in an economy that still has many worried about a return to recession.

Despite a relatively good earnings reporting season from corporate America, the attention has quickly swung back to the economy and more particularly, the consumer. Now that the build-up of inventory has largely stopped and the flow of imported goods has continued, the question on everyone’s lips is whether the embattled US consumer will be enticed out of his/her shell to spend a little more.

If they don’t, however, that could spell trouble for not only the US economy but others as well. The outcome could be a period of deflation but the damage may be limited depending on the government response. If investors can see prices declining already, then surely the Federal Reserve and the government can too. Even though interest rates are already close to zero in the US, there are still many ways the economy can be helped to get back on its feet.

In our view, the sickly US economy may dominate market direction for some time yet.

In complete contrast, worries about the Chinese economy overheating have abated slightly after the manufacturing sector cooled in July to its slowest rate in 17 months.

The official purchasing managers’ index in China fell to 52.1 in July signalling the economy is still expanding, but at a slower rate. A reading above 50 signals expansion.

Almost laughably, the People’s Bank of China - the equivalent of the Federal Reserve - said that the slowdown was beneficial for long term sustainable growth and there was little risk of a double-dip recession. Recession and China are two words that do not fit in the same sentence for now.

After expanding at 11.9% in the first quarter of 2010, economic growth in China is now closer to 10% annualised. The ‘China effect’ has been in evidence in this week’s half year results from mining giants Rio Tinto and Xstrata. More encouraging however are the outlook statements from the respective CEO’s which point towards ongoing industrialisation and urbanisation in China, and India, as the main catalysts for robust growth in commodity demand in the mid to long term.

Xstrata trounced expectations with profits soaring 153% to US$2.3bn as metals demand from China grew rapidly and the US economy continued its gradual recovery. Rio Tinto meanwhile saw its half-year net profits more than triple to US$5.8bn.

Elsewhere, developments at BP have taken a positive turn. The oil giant has now started pumping cement into its Gulf of Mexico well and a government report showing that the majority of the spilt oil had disappeared may represent a crucial turning point.

The findings which were spearheaded by the National Oceanic and Atmospheric Administration claim that most of the 4.9m barrels of oil that BP has leaked into the Gulf of Mexico were no longer in the water… great news for those whose very livelihood has been affected and great news for BP shareholders.

Whilst uncertainty over both clean up costs in the near term and litigation costs over the long term prevail, the latest development as well as the boardroom reshuffle should see BP gradually disappear from the headlines. This in itself could bolster investor sentiment and the spotlight will now turn to the value of group’s assets as life post-spill gets underway.

Turning to the charts, the 200 day moving average has now been broken opening up our upside targets of c.5700/5,800 which is derived from the completion of the recent bullish flag continuation pattern and the inverse head and shoulders pattern. This upside target is very close to the 2010 high, should the 5700 target be reached a test of the 2010 high would be extremely likely.



The 5,332 level should now provide near term support, this level is equal to both the June high and the 200 day moving average. The recent low of c.5,090 and the key psychological 5,000 level are likely to provide support if the 5,332 level is breached.

The Dow meanwhile managed to convincingly break out from the downtrend line in place since the June 10 high. In addition, has closed above the 200 day moving average (red line) at 10,418, which is very bullish. The converging RSI and MACD are supportive of the upward move, which leaves us with an upside target towards the May 13 high of 10920.27.



Downside support lies at the 200 day moving average (red line), followed by the psychological 10,000 level.

Gold continues to bear weakness in the shorter timeframe. Two consecutive flag patterns saw the yellow metal print an intraday low of US$1157.05 on July 28. As previously mentioned, firm support was located between the US$1150 – US$1156 region. This level of confluence saw the 200 period moving average (red line) and May 5 low reside. Resultantly, we saw a strong bounce from this upper region, which saw Gold reach a recent intraday high of US$1190.45 on August 2.



Overhead resistance is located at the US$1200 level, followed by the 50 period moving average (green line) at US$1211. The trend in the short term is down, thus we could potentially see this corrective move retrace lower towards the US$1150 region.

Our longer-term bullish view remains in place in line with the longer term uptrend.