Asian markets are outperforming a weak US lead today with strong gains on the Nikkei, up 2.6% aided by a weaker Yen. The Hang Seng and Kospi are also seeing a positive day up 1.2% and 0.3% respectively. The Shanghai composite is on fire higher by 2.1% at 2629 after initially struggling to break strong resistance at 2600; a sustained break here should be good for other Asian bourses such as Australia who seem obsessed with the Shanghai's price action.

The Australian market initially saw sellers emerge after a weaker than expected CPI print had a negative effect on the domestic currency. However, going into latter part of the session Australian investors focused on Asian leads and pushed the index back above the 4500 level. With the index closing up 0.7% at 4529 buying momentum could be seen in the financial, consumer staples and Industrials which were all up between 0.7% and 1%.

The view in the market seems to be one where we are seeing a trade-off between positive technical's and corporate earnings against the backdrop of a slowing US economy. Last night's consumer confidence data revealed that consumers are simply not prepared to spend until more dynamic job creation comes to fruition.

With the index breaking below the 4500 level intra-day, traders are questioning why the Australian market is underperforming global markets? A note from Deutsche Bank strategist Tim Baker today may help answer this question, he said "Offshore buying of Australian equities could increase if there is confidence that the Australian dollar can maintain current levels around 90 cents. Additionally, with Australia's recent underperformance, the market is now trading at a PE discount to many other countries, including the U.S., Canada and New Zealand, as well as most markets in the region. And with earnings risk for Australia unlikely to be greater than for many of those countries, foreign investors could see the Australian market as offering value."

The biggest event risk of the week saw the CPI print weaker than expected at +0.5% vs. 0.8% eyed by economists. Given the money markets were pricing in around 28% chance the RBA would move the cash by 25 basis points in August the weaker than expected CPI print has cut expectations to zero and the move from 90c to 89.30c was merely this expectation being priced out. What is interesting though is the relationship between the Australian dollar and the equity market. One would think that because the chance of an interest rate is lower you may see gains in equities, however this was not so - instead we saw initial weakness as currency traders sold A$ positions. There seems to be a growing chorus of traders and strategists who believe the Australian dollar above 90c will entice offshore funds back into the Australian market given it is more appealing to hold stock in a currency that is appreciating.

There was also no real pick up in buying activity in the retailers who have been under pressure as the deep discounting we are seeing and enjoying comes at the expense of their margins. The Australian consumer has shied away from big ticket purchases which are causing these retailers to slash prices, with the market pairing back rate expectations for August you may hoped to see some relief. Still we have seen a marked improvement in Europe from both credit spreads and banks performance and this could breed global confidence, if the data both domestic and abroad improves it will not take long for traders to start calling for the RBA to move.

Looking around the market today it is was the financials who showed the real strength with the sector up 1% on the session. QBE, after seeing heavy selling for the last two days, was the standout with gains of 1.8%, the big four banks were stronger with NAB fairing the best up 1.5%.

Financials initially added good strength to the index with traders warming to the agreement reached by the Basel committee on financial reform proposals. Analysts believe it is a positive outcome for Australian banks and will substantially lower their task in achieving compliance with the new rules. Citigroup believe this could improve future return on equities.

Looking elsewhere -the Industrial sector was up 0.7% with Downer EDI having a good day with a 6% gain. The engineering company announced contract wins worth a$2 billion with BHP Billiton Mitsubishi Alliance; they were quick to defend their financial position saying they had ample funding for any new equipment needed for the projects.

The Telecom sector is seeing the day's biggest losses with Telstra down 0.9%. Merrill Lynch cut their rating on the stock today to underperform, saying its EBITDA estimates are 6% below consensus for FY12 and 12% by FY14. "In our view, the market is under-estimating the potential for earnings compression from current price discounting, lack of large cost-outs and higher cost of goods sold from new devices," says the broker. "On an underlying basis (ex one-off NBN compensation), we estimate EBITDA could decline by 6%-7% per annum over 2012-2014, which would put downward pressure on Telstra's EV/EBITDA multiple."

All in all it was positive to see the index rally back above 4500, we need to see a continued uptrend which will encourage traders to put cash to work in the equity markets again. Things are looking rosier globally and if the risk trade continues we should see Australian dollar appreciation which in turn should see the Australian market outperform. There is also a large build up of short positions in Australia; a continued move higher will see these short squeezed out of the market pushing the index higher.