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11 January 2011

Equities Rise on Strong Petroleum Prices

Written by dslmpartners
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Global equity markets were mostly higher, although gains in Asia were relatively modest. In Asia, the MSCI Asia Pacific consolidated two days of losses to end virtually flat. The Japanese market struggled, with the Nikkei underperforming to drop 0.3% on the session. China’s Shanghai index rose as banks and developer rallied after new lending exceeded the government’s target. Meanwhile, European bourses are rebounding from a two-day retreat, as the Euro Stoxx 600 is up 1.0% so far today. The FTSE rose for the first time in four days, led by technology, while the Dax rose for the first time in three days by 0.6%, led by industrials. The US equity markets were pushed higher by a rebound in commodity prices.

Crude oil prices continued to rise for a second straight day after BP announced over the weekend that their Alaska pipeline was shut down due to a leak in the pipeline. Petroleum prices moved above $91 dollars a barrel, as there is no estimate for when 10% of US domestic production will begin flowing again.

Japan Finance Minister Noda expressed the desire to purchase EFSF debt, not individual sovereign paper. Referring to the upcoming planned EFSF issuance, he said “It’s appropriate for Japan to make a contribution as a leading nation to increase trust in the deal. We want to buy more than 20%”. Statements may have helped the euro at the margin, but we repeat what we wrote after recent press reports playing up Chinese purchases recently. As we said then, these purchases are would be a band aid solution and simply do not address the unsustainable debt dynamics. While these two Asian countries hold very large amounts of foreign reserves that must be invested,  the potential purchases of EFSF is unlikely a game changer. It may help buy some limited time, but not much else.

While the China backdrop for Australia remains constructive, AUD continues to be hit by the effects of the flooding. Furthermore, Australia’s November trade balance came in smaller than expected, and while the impact of the flooding wasn’t felt yet, investors continue to worry about the effects on exports. Indeed, RBA tightening expectations have been dialed back sharply as a result of the flooding.