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Father of BRIC: China Matters More to S&P Than Italy

Monday, 11 Jul 2011 | 1:40 PM ET

On Monday, both the Dow and S&P took a dive, with the Street worried that Italy was about to get sucked into the continent’s sovereign debt woes.

However on the Fast Money Halftime Report, Jim O’Neill, chairman of Goldman Sachs Asset Management and father of the BRIC acronym, says that as concerning as events in Italy may be – the health of the bull rally for American investors has much more to do with China.

”The most important development over the past 3 days is Chinese inflation numbers and what now follows from that,” he says in a live interview on CNBC. “That’s the key to how (to invest) over the second half of this year.”

Over the week-end, new data showed inflation in China rose to a three-year high of 6.4 percent in June. The new data again led to China's premier and the country's central bank governor to again promise that curbing high inflation would be priority one in Beijing.

That sounds bearish on the surface, however, Street chatter suggests its not. Largely pros believe China’s inflation is near its peak. “I’m in that camp,” says O’Neill.

WOTS: Italy Feels the Heat
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”That is absolutely consensus,” adds Fast trader Stephen Weiss. “It’s hard to find a dissenting opinion."

If that’s the case O’Neill tells us as inflation comes in, he expects Beijing will take an easier stand on monetary policy – which, in turn should ignite a new leg of the global bull market.

”The combination of (the growing purchasing power of) BRIC consumers and accommodative monetary policy, from the Fed especially, is a recipe for bull market in equities,” “O’Neill says. “And ironically the weak jobs report (on Friday) consolidates a very accommodative policy for even longer.”

Of course, the trading thesis above is largely for long-term investors. If you trade on a short-term time horizon, the situation looks a little different.

”In the short run we probably have a rough patch for at least a month,” says trader Patty Edwards.

That’s because a debt crisis in Italy could spook already jittery investors. “We can’t afford many days of this – it will bring back fears of contagion – everywhere,” says O’Neill.

In other words, Italy's debt woes could trigger an aversion to higher risk assets – at least until the market better understands who has exposure to the woes – and who doesn’t.

* And for what it’s worth, O’Neill concedes if he’s wrong about China inflation “we’re probably going to have a more difficult back half of this year.”

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GOLD HITS RECORD IN EUROS

In a world where nearly all paper currencies are rejected, gold has been breaking out. In euro terms, the metal hit an all time high on Monday.

Trader Brian Kelly also expects gold to make an all-time high in dollar terms soon, not only because it's become a quasi-reserve currency but also as a safe haven bid.



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Trader disclosure: On July 11, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Patty Edwards Edwards is long (XLK). Patty Edwards is long (PM). Steve Weiss owns (VZ), (TBT), (DRR), (UUP), (QCOM), (NS), (ETP), (MSFT), (MRK), (JPM), (AKAM), (HBAN), (CMA), (KEY), (WFT) and (MDRX). Steve Weiss is short (X). Steve Weiss is short (FLR). Jon Najarian is long (CAG) call spreads. Jon Najarian is long (CIGX) call spreads. Jon Najarian is long (UA) call spreads. Jon Najarian is long (EUO) call spreads.

PATTY EDWARDS
Edwards Owns (AAPL) For Clients
Edwards Owns (AMZN) For Clients
Edwards Owns (SYT) For Clients
Edwards Owns (MON) For Clients
Edwards Owns (POT) For Clients
Edwards Owns (WFM) For Clients
Edwards Owns (MDC) For Clients
Edwards Owns (PM) For Clients
Edwards Owns (XOM) For Clients
Edwards Owns (XLB) For Clients
Edwards is long S&P500 For Clients
Edwards is long Nasdaq 100 For Clients
Edwards is long Russell 200 For Clients
Edwards Owns GOLD For Clients
Edwards Owns SILVER For Clients

BRIAN KELLY
Accounts Managed By Brian Kelly Capital Own (.AUX)
Accounts Managed By Brian Kelly Capital Own (NZDUSD)
Accounts Managed By Brian Kelly Capital Own (.MON)
Accounts Managed By Brian Kelly Capital Own (CLF)
Accounts Managed By Brian Kelly Capital Own (INTC)
Accounts Managed By Brian Kelly Capital Own (QCOM)
Accounts Managed By Brian Kelly Capital Own (RTH)
Accounts Managed By Brian Kelly Capital Own (SLV)
Accounts Managed By Brian Kelly Capital Own (TBT)
Accounts Managed By Brian Kelly Capital Are Short the British Pound

JIM O’NEILL
** Pending

JEFF KILBURG
** No disclosures

CNBC.com with wires.

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