With much of the US corporate earnings figures now out of the way this will be an important week. Add to this rate announcements out of the UK and Europe and we have the makings of some nice movements. the only problem is, as ever, working out which way the market will move. Though we remain very sceptical about stock market valuations we are however mindful of the fact that the market is irrational and it is the flow of money, rather than a subjective view of valuations, that will decide the direction of the worlds stock markets.
Flows into equity funds in January have been strong and thus far fit in with our view that the US market will remain buoyant ahead of the US election. The Bush administration, post September 11, showed how adept it was, with the help of their chums in big business, in propping up the equity market. This trend has carried on with last weeks passing of a bill that will limit companies pensions liabilities, saving companies $80 billion over the next two years.
An interesting potential indicator will be the dollar. I say potential advisedly. In 2002 trading equities was easy. If the dollar went down equities followed and vice versa. This correlation broke down last year but there are signs that it might be trying to re-assert itself. The last four weeks have seen a rise of foreign buyers of US Treasuries and this figure on a trailing four week average is now equal to the monthly US Trade deficit. This balance will mean that the Dollars continued fall is far less certain than many commentators would have us believe, and will allow traders such as us some interesting short term opportunities.
One piece of news to keep an eye on is this Avian flu. The weekend allegedly saw the first human to human transfer of the disease in Vietnam and though this is not a major problem yet it could become one and requires monitoring.
Harry
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