From Gareth Stokes, MoneyWeek editor,

Dear Money Morning Reader,

As we page through the weekend financial press we can’t suppress a feeling of unease. Where is the ‘feel good’ economic news to underpin the 17-plus price-to-earnings valuation on the JSE All Share index? Market commentators dismiss our concerns with promises of 25% per annum earnings growth in FY2010 and 2011. The problem is this growth comes off a very soft base! If any of South Africa’s resources stalwarts post disappointing numbers you can expect the current valuation to go up in smoke!

The best way to gauge stock market sentiment is to look at share price movements. Amidst all the talk of economic recovery you’ll be surprised to learn the JSE has shed 7.26% over the first five weeks of 2010. Mr Market doesn’t believe the outlook is so rosy! In their typical ‘two hat’ approach financial analysts are dismissing the fall as a long-overdue correction while pontificating on fantastic prospects for the domestic economy. You could probably argue both sides of the debate.

On the plus side the PMI is up six months in a row. Economists also expect next week’s manufacturing data to support a recovery in Q4 2009 GDP. Positive indicators include electricity consumption (up 1% Q4 over Q3) and manufacturing capacity utilisation, which topped 80% last quarter. Clearly the manufacturing sector is gearing up for growth. On the negative side we remain part of a struggling global economy. Credit liquidity concerns have largely been dealt with, but governments in developed countries have new obstacles to overcome. The strangely named Pigs – Portugal, Italy, Ireland, Greece and Spain – spent billions to ward off the financial crisis and are now hopelessly indebted. Their theme for 2010: Money’s too tight to mention! As international investors cotton on to this fact they’re dumping the Euro in favour of the good old US dollar.

Economics is a fantastic stage for so-called ‘cause and effect’ studies. When the dollar strengthens the prices of most commodities weaken. So a crisis of confidence in Europe triggers a sell-off in gold and results in oil dipping below $70/barrel for the first time in ages. JSE-listed resource giants like BHP Billiton, Anglo American and Sasol bear the brunt of these commodity price slumps and bring the entire index down with them. You can appreciate the impact of resource shares on the JSE All Share when you look at the relative performance of its three major sectors this year: All Share index (down 7.26%) versus resources (down 13.4% from recent highs), industrials (some 2.7% softer) and banking shares (up 12%)! Does this mean you should avoid resources shares through 2010?

It’s an impossible question to answer. Because global recovery dictates stronger commodity prices the real question is whether global economies will power ahead this year, or whether we’re entering the dreaded double-dip recession. We’re not the only ones concerned about a sharp pullback as the global economic recovery falters and one of the reasons we’ve stuck with defensive shares.

Turning to the markets...

The JSE all share index slumped 0.33% on Friday. The gold mining index gained 1.25%. Resources fell 0.21%. Banks and financials weakened 1.33% and 0.61% respectively. Industrials pulled back 0.33% and the platinum mining index decreased 1.03%.

London's FTSE100 shed 0.37%. The Dow Jones slipped 0.44% and the Nasdaq closed up 0.28%.

Tokyo's Nikkei closed down 0.52%. Hong Kong's Hang Seng lost 0.11%.

Brent crude is currently trading at $72.90 per barrel.

Spot gold's trading at $1,092.36 and platinum was last quoted at $1,510.50.

And here's how the rand is performing against the major currencies:
R/$7.71
R/₤12.08
R/€10.48