\n\tBy Greg Peel<\/p>\n
\n\tWall Street ended another week on a high note, kicking up on the death in another display of what now seems to be the trend. The positive finish ensured the third week of record closes for the S&P 500. Friday’s range was tight, but this belied of lot of switching action, with cyclicals<\/span> such as materials continuing to draw favour<\/span> at the expense of defensives such as utilities. The S&P closed up 0.4% to 1633 as the Dow rose 35 points, or 0.2% and the Nasdaq<\/span> added 0.8%.<\/p>\n \n\tThe stock market nevertheless took a bit of a back seat to other markets last week, specifically forex<\/span> and bonds.<\/p>\n \n\tTry this one on for size: power-reversal dual-currency notes. If you thought the GFC<\/span> had brought an end to super-sophisticated financial derivatives that virtually no one understands, think again. We recall that last Thursday night the US dollar suddenly shot up through the 100 yen mark, which had previously seemed impenetrable. At the time, Wall Street wasn’t quite sure why. Well it turns out it’s all to do with these babies.<\/p>\n \n\tPRDCs<\/span> are structured products designed to benefit from interest rate differentials between currencies, in this case the dollar and the yen. To hedge these positions, banks buy long-dated US Treasuries, which then have to be sold out as the yen weakens. When the yen fell (up) toward 100 again on Thursday, a snowball effect followed that saw stop-loss orders triggered and bond positions rapidly exited. In one and a half trading sessions, the dollar has rocketed from 98 yen to Friday’s close of 101.6 yen, or 3.6%, which is a huge move in currency terms.<\/p>\n \n\tThe flipside<\/span> is US Treasuries. On April 27, the US ten-year yield hit 1.63% as US economic data began to weaken. The subsequent strong jobs numbers sparked some selling, but when the yen started to move as well, all hell broke loose. On Friday the ten-year closed at 1.90%, up 9bps<\/span> for the session and up 16.5% from April 27. Observers would be forgiven for thinking perhaps the switch out of bonds into equities is finally on, but in reality it’s mostly to do with the yen.<\/p>\n \n\tAnd hold the phone, all this means that the Aussie has now traded below parity<\/u><\/strong> for the first time in almost a year. Early Saturday morning it had recovered slightly to sit at US$1.009. There are a lot of international punters long the Aussie on the back of the China story, let alone interest rate differentials. As the China story eases, the floodgates could possibly open.<\/p>\n \n\tI’ll bet right here and now that if the Aussie trades below parity today, Wayne Swan will take the credit. On Friday he declared that ANZ’s<\/span> 27bps<\/span> mortgage rate cut was a result of the government’s tougher bank competition rules. Laugh? Laugh?<\/em> I almost paid the electricity bill!<\/p>\n \n\tSudden strength in the greenback may well prove beneficial for the Australian economy, but it offers little joy to gold bulls. Gold fell another US$13.70 to US$1443.20\/oz on Friday night as the currency\/bonds trade played out. The 1% jump in the US dollar against the yen assured a 0.6% gain on the dollar index to 83.14.<\/p>\n \n\tA strong dollar also puts base metals under pressure, although bellwether copper is still finding technical support after its big plunge a week earlier. Copper rose 0.5% on Friday and the other metals posted mixed results. The oils played to script, with Brent falling US56c<\/span> to US$103.91\/bbl<\/span> and West Texas losing US50c<\/span> to US$95.89\/bbl<\/span>.<\/p>\n \n\tSpot iron ore fell US60c<\/span> to US$129.60\/t.<\/p>\n \n\tThe SPI<\/span> Overnight rose 7 points.<\/p>\n \n\tThe G7<\/span> finance ministers and central bankers met in London over the weekend and decided it was not appropriate to censure Japan for its aggressive monetary policy and the resultant plunging yen, particularly considering the G7<\/span> has been at Japan for years to do something constructive and secondly because, well, people in glasshouses…<\/p>\n \n\tThe ministers did, of course, agree only to target domestic considerations and not exchange rates with their internal policies. Pull the other one, it plays the Star Spangled Banner. The ministers then pushed on to decide that after five years it’s probably about time they hurried up with international bank reforms, including measures to cope with “too big to fail” institutions, and thus committed to a torrid schedule of giving it some more thought. The proposed fiscal union for the eurozone<\/span> was debated, and generally agreed to be pie in the sky. Germany, Britain and Canada remain on the side of ongoing austerity, while France, Italy and the US want to see growth.<\/p>\n \n\tThe rest of us simply moved on.<\/p>\n \n\tLast week was a quiet one on the US economic data front, hence the US dollar was free to jump as it did without any good\/bad data to otherwise provide an influence. This week will nevertheless be different.<\/p>\n \n\tTonight sees US retail sales and business inventories, while Wednesday brings industrial production, housing market sentiment, the PPI and the Empire State manufacturing index. Thursday it’s the CPI, housing starts and the Philadelphia Fed manufacturing index, and Friday sees the Conference Board’s leading index and the Michigan Uni<\/span> fortnightly consumer sentiment survey.<\/p>\n \n\tPlenty of grist for the greenback mill there.<\/p>\n \n\tThe eurozone<\/span> also has some important numbers out this week, including industrial production and the ZEW<\/span> investor sentiment survey on Tuesday, a revision of first quarter GDP on Wednesday and the trade balance on Thursday. Japan will revise its first quarter GDP on Thursday.<\/p>\n \n\tChina will release industrial production, retail sales and fixed asset investment numbers today.<\/p>\n \n\tAustralia’s economic week features housing finance, investment lending and the NAB business confidence survey today, and vehicle sales and the March quarter wage cost index on Wednesday. On Tuesday night Wayne Swan will attempt to appear to know what he’s doing, while those across the aisle will have to shove their ties in their mouths so as not to seem disrespectful of the solemn occasion. Careful Joe – you’re next. Federal Budgets do not typically a have major impact on the stock market unless there are clangers<\/span> in there we haven’t heard about yet.<\/p>\n \n\tThe out of cycle earnings reports will continue to flow from Australian corporates<\/span> this week. Today sees an interim result from Incitec<\/span> Pivot ((IPL<\/span>)) and DuluxGroup<\/span> ((DLX<\/span>)) and Stockland<\/span> ((SGP<\/span>)) will hold an investor day. CSR ((CSR)), SingTel<\/span> ((SGT)) and SP<\/span> Ausnet<\/span> ((SPN<\/span>)) all provide full-year reports on Wednesday, along with a quarterly update from Paladin Energy ((PDN<\/span>)). Graincorp<\/span> ((GNC<\/span>)) reports its interim on Thursday.<\/p>\n \n\tWestpac ((WBC)) goes ex both its regular and special dividends today (96c<\/span> in total plus franking), while Macquarie Group ((MQG<\/span>)) also goes ex today.<\/p>\n \n\tRudi will appear on Sky Business today and between 12-12.45pm and on Tuesday at 5.30pm. \n\tFor further global economic release dates and local company events please refer to the <\/em>FNArena Calendar<\/a>.<\/p>\n
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