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• Earnings season provides for hits and misses.
• Carry trade is back in Vogue.
• RBA Governor spruiks AUD by default.

Earnings season for 2010 was always going to be a test of the mettle of investors and the recent diversity in figures has failed to disappoint. We watched a sizeable correction last week as the S&P500 tanked, losing close to 3% in Friday’s session. This was off the back of stocks in the Financial sector reporting lacklustre revenue figures which saw Bank of America shed 9.2 percent. It is still early days in the corporate reporting season and equity markets are looking for signs that corporate America is back on track. Strong earnings figures are being somewhat overshadowed by economic data in the US in what is currently a stock market heavily influenced by the macro data. 

This month has seen Fed rhetoric and US stocks in stark contrast to one another which has ensured that the carry trade is back in Vogue. This is where investors borrow at low interest rates and invest in higher yielding assets such as those in Australia. With greater downside risk apparent in the first half to 2010, this strategy became less favourable however the resilience of the local economy of late and dovish rhetoric from the Fed has provided for an improved carry trade environment. This was highlighted by the Fed meeting minutes released last week which noted that “the economic outlook had softened somewhat and a number of members saw the risks to the outlook as having shifted to the downside”.

Governor Glenn Stevens was notorious for spruiking the pressure on the RBA to raise interest rates during 2009 and this year he has effectively left centre stage with little more than the occasional economics lesson. A speech yesterday was a terrific example when he noted that “the board will meet, it will consider all the issues for the economy, and do its job…what else would people expect”-traders listening for an inside line were given little by the RBA Governor. In contrast however, the RBA minutes on Tuesday provided a neutral weighting on potential interest rate hikes however the comments suggested that the relative pressure on global interest rates was still heavily skewed towards the Australian economy. Furthermore, traders treated an absence of dovish commentary as good news and pushed the Aussie higher and as a result the AUD gained more than a cent against the USD, before the overseas equity markets had opened.