The Monday Report

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By Greg Peel

There was mayhem in the Greek government bond market on Friday night as the yield on the ten-year blew out to 470 points over the equivalent German bond before reversing to close at 410 over. Initially sparking the sell-off was a downgrade of Greek debt by ratings agency Fitch from BBB+ to BBB- which is the lowest investment grade.

But the downgrade only made it more likely Greece would have to turn to the EU for help and to that end an emergency meeting of EU members and the IMF on Sunday came out with an offer of 30bn euros at 5% from the EU available over the rest of the year, and another 10bn from the IMF if needed.

The interest rate is below the 7% plus yields being priced in by the market but above the level of a typical IMF emergency loan. The EU is attempting to balance between preventing Greek default for the sake of the euro and imposing a sufficiently punitive cost on the profligate nation. Greece has not yet asked for funds, preferring to stick with attempts to raise funds in the market and thus avoid the even tougher restrictions accompanying the bail-out package. But Greece has an ominous 54bn euros of funding requirement before year-end.

The bounce in the Greek bond on Friday night and a subsequent rally on Wall Street came about as EU leaders insisted a rescue plan was ready if needed, immediately if necessary. The fact Greece would probably send up a flare very soon was actually calming for the markets, which have been volatile on the uncertainty of recent developments. If Greece is in EU hands markets can rest a bit easier.

The Dow closed up 70 points on Friday or 0.6% to be an insect's appendage shy of the magic number at 10,997. The S&P added 0.7% to 1194. While the Dow's importance is more token than pragmatic, a break of 11,000 nevertheless would have positive psychological implications.

A rebounding euro helped the US dollar index to fall by 0.75% to 80.89, sending gold up US$11.20 to US$1161.40/oz. The US dollar's dip helped base metals regenerate some interest, with each of aluminium, lead and nickel rising over 1.5%.

Oil, on the other hand, is still struggling to post an up-day. Oil recovered from earlier lows on Friday but was still down US55c to US$84.92/bbl.

Adding to general stock market strength on Friday was news US wholesale inventories had surged by 0.6% in February, well above 0.3% expectations. More importantly, sales increased by 0.8% which means the fresh inventory is not at risk of gathering dust. But January's inventory number was revised from down 0.2% to up 0.1%, so take February's number as you will.

The Aussie leapt another half cent on Friday to US$0.9330 and the SPI Overnight gained 19 points or 0.4%.

With the Greek situation now seemingly under control, Wall Street is free to turn inward once more. Borrowing costs are also a US concern but the ten-year yield is struggling to penetrate 4% and finished on Friday at 3.88%. Surging inventories should provide more grist for the Fed rate rise mill, but Bernanke is adamant rates are going nowhere for the time being, at least not until there are improvements in employment and the housing sector.

So it's over to reporting season, which officially begins tonight with the Alcoa March quarter result. Thus begins several weeks of reporting and analysts have already built in substantial earnings improvements – so much that many see more downside than upside to indices. But with stock markets seemingly determined to rise, good results should see the pre-Lehman levels finally breached.

Earnings have improved in the past couple of quarters, but almost exclusively on cost cutting. This quarter, more than ever before, Wall Street will be looking for strong earnings growth to be supported by strong revenue growth, thus indicating actual economic growth rather than just GFC-inspired cost reduction.

It is also a busy week on the US economic calendar. The Treasury's monthly budget is released tonight and the trade balance on Tuesday, along with import prices. Fed chairman Ben Bernanke will make a regular two-day testimony to Congress beginning Tuesday.

Wednesday brings the CPI and retail sales along with business inventories and the Fed's Beige Book – an anecdotal assessment of the state of the US economy. A busy Thursday sees industrial production, long term capital flows, the housing market sentiment index, and both the Empire (NY) and Philadelphia Fed manufacturing indices. Friday is housing starts and the first Michigan Uni consumer confidence survey for the month.

All of the US, the EU, Japan and China will provide industrial production data this week. China's result is on Thursday amongst the regular monthly raft of measurements, including retail sales, PPI, CPI and fixed investment. But most importantly, Thursday sees the release of China's first quarter GDP. Economists have pencilled in 11.6% growth.

Australia's week is a little less frantic, beginning with housing, credit card and investment lending data today. Tomorrow sees the NAB business conditions and confidence survey, and Wednesday the Westpac-MI consumer confidence survey. The week wraps on Thursday with consumer inflation expectations.

We are still seeing a final trickle of ex-dividends locally but we are also now into AGM season. And this week will see the beginning of the resource sector's quarterly round of production reports, with Rio Tinto ((RIO)) of particular notice on Thursday.

Bank of Queensland ((BOQ)) will report its interim result also on Thursday. 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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