Australian Markets See Sharp Reversals Overnight

The Australian markets had a strong session backed by another day of Dow gains and very strong domestic labor data. However, another panicky wave of carry trade liquidation and instability in the capital markets caused the Aussie lose all of its gains in the past 24 hours, with high probability of dipping even lower. The ASX closed minutes before the liquidation, and preserved its gains on the charts, but in real time the futures have already plunged. The 10-yr yield followed the equities.

Australia nearing ‘full employment’ - After the data release showed 21,800 jobs added to already tight labor market in July, the federal treasurer Peter Costello commented that Australia is pressing towards full employment. The unemployment rate stayed unchanged at 4.3% and Costello noted that people moving between jobs, retraining and relocating would prevent the unemployment rate from going to zero and even makes a 4.0% benchmark questionable. Source: Herald Sun,21985,22215209-5012062,00.html
MacBank sketches Ivanhoe float - MacQuaquarie Bank is believed to be wrapping up a $90 million float of Australian Assets of Ivanhoe Mines. The details of the deal are not fully revealed, but the expected start of the float is anticipated to be on September 3. The Ivanhoe Mines, located in Qeensland, contains gold, copper and uranium deposits. The uranium is likely to attract investors, however the uranium mining is still banned in Queensland with no hint at when it will be allowed. Source: The Australian,25197,22207692-5005200,00.html
Bendigo ‘in merger talks before BoQ rejection’ - Bendigo Bank has revealed today it was in merger talks with Adelaide Bank before original and revised takeover offer of Bank of Queensland (BoQ). The analysts were surprised when Bendigo rejected two generous proposals of BoQ earlier this year. Bendigo and Adelaide announced that they are planning a merger, with assets of $4 billion that will allow them to leave footprint in all states and territories. Bendigo chairman Robert Johanson told the press that a number of structural issues arose in the proposed merger with BoQ that did not exist with Adelaide Bank. He did not reject the possibility of BoQ coming back with yet another hostile bid for either Bendigo or Adelaide. Source: Herald Sun.,21985,22215302-5012062,00.html
The strong employment data released today that showed 21,800 jobs added in July and the unemployment rate remained at historic lows of 4.3% (against market expectations of the unemployment easing to 4.4%) have helped the Aussie stay firmly above the 86 cents benchmark. The tight labor market that is “nearing full employment” according to Federal Treasurer Peter Costello is driving up the wages and inflation. The rising Dow index and rally in the yen pairs caused by return to the carry trade helped further boost the Aussie. The Chinese threats of massively liquidating their USD reserves crippling the US economy and currency have caused a tumble of the US currency with all majors gaining against the US dollar in the past 24 hours. The Aussie reached a high of 0.8662 overnight, making a bold move towards 87 cents. At the time of the report, however, the US dollar strengthened, while all yen crosses sharply dropped in what appeared to be a new strong wave of risk aversion. The high volatility is usually viewed negative for the carry trade and the high-yielding currencies, such as the Aussie.

[B][U]Stock Market
The ASX rallied on the positive lead from the Dow and remained strong intraday despite the weakness of the metals, especially copper. The unquestionable leaders were banks, that were more than glad to see the Australian unemployment stay at record low 4.3% and 21.8K jobs added to the Australian labor market. The latter remains tight, which creates inflationary pressure and puts upwards pressure on wages, leading banks to believe that its customers will be able to pay off their off their mortgages and loans. The retailer Westfield was the leader of the ASX index today with a 3.4% gain on strong profit report. Commonwealth Bank of Australia and National Australia Bank were next two largest index movers with 1. 5% and 1.3% gains respectively. The index gained 64.8 points to close at 6165.6. The index closed minutes before the overnight panic began though, and the ASX futures were down 46 points at 6105 at the time of the report.

[B][U]Bond Market

[/U][/B]The 10-yr yield saw strong gains on the positive lead from the global capital markets and maintained close correlation with the ASX index during the day. The yield tumbled in the new massive wave of liquidation that happened shortly after the ASX closed. The yield was still in the black against yesterday with a 4.3 bps gain at 6.055%, but already dipped below the open at 6.128%.