The Monday Report

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By Greg Peel

Friday night saw Wall Street continuing in an upbeat mood following the kick from positive earnings reports on the Thursday night. The Dow rose 102 points or 1.0% while the S&P 500 reconquered the 1100 mark, rising 0.8% to 1102.

More well received earnings results on Friday from the likes of Verizon (Dow), McDonalds (Dow), Ford and Honeywell added to a mix that was mostly focused on the results of the European bank stress tests.

There has been a lot of debate over these stress tests, with cynics suggesting the ECB was starting with a preferred outcome and then setting criteria which would ensure that outcome. In the end, only seven of 91 banks tested were deemed to require extra capital to protect against further weakness, which included a test against a 3% drop in EU GDP compared to the 1% growth currently forecast. None of the “losers” caused any great surprise.

What the testers did not divulge is just what level of sovereign debt weakness was factored in. European banks hold between them the bulk of sovereign debt issues from the likes of Greece and Spain, and the fear of a European crisis has been based not so much on the impact of sovereign restructuring on the country in question but the fallout and possible chain reaction through the commercial lenders which are forced to take a “haircut”.

The detailed results will be released next month, but in the meantime many European banks have taken it upon themselves to assuage such fears, independently publishing their balance sheets for all to see and assess. The result on Friday night is that the cost of insuring sovereign debt amongst the PIIGS generally fell.

The result was a slightly stronger euro leading to a weaker US dollar index. After its big run up on the Thursday, the Aussie was relatively steady at US$0.8955. Gold lost US$4.80 to US$1189.70/oz.

Demand for European bonds was countered by selling in US bonds, pushing the US ten-year yield back to the level of 3% which is psychologically important for the stock market.

Oil lost US67c to US$78.64/bbl, while technical trading triggered stop-loss orders in London sending lead and tin up 2-3% when the others were only modestly stronger.

The SPI Overnight added 40 points or 0.9%.

Two weeks of US earnings reports have met with mixed results, particularly in terms of outlook for the September quarter. But close to 80% of stocks reporting have beaten on earnings and around 65% have beaten on revenue, so realistically it's a positive trend. There will be plenty more reports released this week, along with more economic data, all of which will provide more evidence as to whether the US might double dip or not. So far, it seems unlikely.

Data in the US begin tonight with new home sales and the Chicago and Dallas activity indices. Tuesday sees the Case-Shiller house price index, Conference Board consumer confidence and the Richmond index. Wednesday it's durable goods, Thursday the Fed Beige Book, and then Friday brings us second quarter personal consumption and expenditure, a Michigan Uni consumer confidence survey, and also the big one – US second quarter GDP. The market is looking for 2.5% growth, down from 2.7% growth in the first quarter.

And earnings season kicks off in Australia this week. The next two weeks will see a handful of reports ahead of the flood mid-August, and GUD Holdings ((GUD)) leads us off today. Later in the week, highlights include reports from Australand ((ALZ)), Coal & Allied ((CNA)), Alesco ((ALS)), Austar ((AUN)), and ERA ((ERA)). Macquarie Group ((MQG)) will hold its AGM on Friday.

The beginning of earnings season has also run into the back of the resource sector quarterly production reports, and this week sees Centennial ((CEY)), Macarthur ((MCC)), Oil Search ((OSH)), Whitehaven ((WHC)), Lihir ((LGL)) and Minara ((MRE)) among others. And Wesfarmers ((WES)) will release its quarterly sales figures today.

On the economic front, it's inflation week in Australia. The headline rate is tipped to exceed the RBA's 3% comfort level but the trimmed mean – which is the RBA's preferred measure – is not. Unless the trimmed mean shoots up wildly, there will be no rate increase next week. Even then, it's not a given.

We kick off today with the second quarter PPI followed by the Conference Board leading index on Tuesday and the second quarter CPI on Wednesday. Thursday sees new home sales and Friday wraps up with private sector credit for June, another set of data the RBA will be watching closely, and the RP Data-Rismark house price index.

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

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