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Tuesday, August 08, 2006

One Last Push?

Well the Fed meeting is later and we'll know if they'll hike one more time or go for a pause. The employment report and weaker than expected 2Q GDP readings should be reason enough for a pause. However we're not expecting a recession, other economic data remain strong. The question is whether economic slowdown is enough to temper inflation. If it's not enough then we might see more rates hikes in 2007 after a temporary pause and a much deeper correction as a result.

Even if the Fed hikes one more time, it is highly likely that they'll give an indication of a pause in the next meeting, which is why we believe there will be a one last push for both stocks and commodities. For our commodity exposure, we have hedged positions in NEM and PD, using covered call options as hedges. We still like RTN being a large industrial exporter and we also have a position in that. In Hong Kong, we have taken a position in 694 which we believe will benefit from Rmb appreciation and continued growth in air travel in China. We also have initial positions in 23, which is a low risk investment into the China banking sector and should benefit from sustainably low HIBOR rates. It has also been upgraded by a couple of brokers. We also have a position in 2038, which was upgraded with a HK$22 price target, and is rumored to be an inclustion candidate for the HSI in September. We have some 9020 puts as our hedge for long positions in Hong Kong. Well this is it, we'll find out if we are correct by tomorrow.

TERENCE

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