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• Stock market bulls continue to run rampant.
• Financial sector gains partly at the expense of reform.
• CPI data pares recent gains for the Aussie.

Earnings season rolls on and the difference in the stock market makeup of US markets and the ASX is ensuring some divergence in their performance. Generally speaking however, there is still a strong correlation and recent results from the US earnings season over the last week have ensured the bulls are still running rampant over the equity market matadors. Despite the Federal Reserve Chairman Ben Bernanke having said last week that the US economy is “unusually uncertain”, a host of companies reported strong figures, including Ebay, Caterpillar Inc and AT&T. Other companies revised earnings upwards in what may be an endorsement of the global economy and a reflection of over-pessimism by investors. It is however US companies releasing figures in stark contrast to the dovish rhetoric from their Fed Chairman.

This week has seen stocks in the Financial sector post stellar gains on the back of less than alarming stress test results and watered down reform of the banking sector. Results from the so-called stress tests of the European banking sector were released on Friday amidst much market trepidation. The results saw the failure of only seven relatively small players in the market and resulted in some concern regarding the methodology used for the tests. The results, however, largely appeased the market and saw risk brought back onto the table. The other news to hit the sector was that the Basel accord, a key initiative to drive banking system reform, had been watered down in what was aimed at reducing the risk of future bank defaults. This flies in the face of the recent examples of the difference in resilience in the banking system in Australia, compared with say, the US. Australian banks performed well during the GFC off the back of the surety on investor deposits but also because of the banking reform done in the 1980s and 1990s regarding the capitalisation of the Four Pillars. Still, the market treated the news well and risk appetite was boosted because capital requirements will be lower.

On the local data front, the Producer Price Index is largely considered a precursor for CPI and, on reflection, Monday’s figure provided a guide of where today’s CPI would lie. The CPI figure of 0.6% was released today at 11:30am and the dismal figure saw investors treat the local currency with scant regard as markets pared recent gains while we watched the local currency free-fall close to a percent in a matter of minutes. This also saw expectations of an August RBA rate hike on Tuesday significantly reduced and interbank futures currently have the probability of a rate increase at 0%. All bets are off in other words and the Aussie is currently largely exposed to risk from the US earnings season as a number of the abovementioned risks have been taken off the table. The next round that global markets have to face may simply be the impotence of inflation in the US however some recent data there has held a silver lining for growth prospects. Election fever is gripping the nation and economic sweeteners for the electorate will have an advanced impact on the economy given the current transition from public sector to private sector demand .Still though, the efficiency with which the policy is implemented is the real test for both leaders, because if inflation is increased it needs to be at the expense of unemployment.

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