Central Banks Calm Investors: Australian Markets Rally

The Australian markets happily absorbed optimistic comments of both the Fed and the RBA about the US subprime woes not being detrimental to growth as global environment remains strong. The ASX had the best day since March, the 10-yr yield felt comfortable above the 6% benchmark and the Aussie moved away from the 85 cents area towards 86.

Rate rise will hurt homeowners, says Howard - The inflationary pressures have forced the RBA to hike the official rate to an 11 year high of 6.5%, as expected by the market and analysts. The rise has led to major banks re-calculating mortgage and lending rates to adjust accordingly. Prime Minister John Howard admitted that the rise will hurt homeowners already strangled with record low house affordability. However, he does not foresee the US crisis repeating in Australia as the hike should be offset by government?s strong Budget surplus and tax cuts. The living costs are soaring and analysts foresee that the tax cuts combined with economic growth might boost the inflation further, creating a possibility of more hikes. Source: Herald Sun
Market defies gravity of rates rise - The usual negative correlation between rate hikes and equities has been broken today. While usually the investor sentiment in dampened by hikes that translate into higher borrowing costs for corporations, the ASX has surged nearly 60 points after the open. The hawkish stance of the US Federal reserve and subsequent rally of the Dow have certainly contributed to the bullish sentiment. Source: The Australian.
David Jones reports 12.1pc sales growth - The supermarket department store David Jones has reported strong growth figures for the fiscal year 06/07 and forecasts more growth due to strong consumer sentiment expected in 2008. The sales grew in all categories and amounted to a 9.0% increase for the past fiscal year and 12.1% growth in the fourth that ended in June. David Jones chief executive Mark McInnes said that the store added more than $300 million in sales after re-thinking their strategy in 2003 and remains confident that the strategy will result in more sustainable growth and yield returns to shareholders. Source: Herald Sun
The Aussie recovered today on favorable decisions of both US Fed and Australian RBA. The Fed kept rates intact and stayed hawkish, which lifted the Dow and subsequent boost of carry trade sentiment. The expected RBA hike boosted the Aussie even further as the widening spread between the Australian and Japanese yields have made it even more attractive to carry traders. The housing price data released today showed strong growth of 3.2% in the second quarter versus prior 1.1%. The concerns that the hike will add further pressure on the Australian mortgage payers and make things as bad as they are in the US have prevented the bulls from rallying further. The analysts note that the Aussie will remain sensitive to the movements of the equity markets and carry trade sentiment.

[U][B]Stock Market
The ASX that remained strong fundamentally, but remained crippled by the tumble in the global capital markets, has finally taken off today. The Australian stocks had a strongest day since March, driven by calming comments both from the US Fed and the Australian RBA. The Fed maintained a hawkish stance and noted that the subprime issue is not going to destroy the US economy and the global environment remains strong. The RBA raised rates cooling off the inflation of a booming economy not intimidated by the turbulence in the global capital markets. The media noted that ASX “lost gravity” as a rate hike usually is negatively correlated with the equities, but this was not the case today. BHP Billiton was the leader of the market move with a 2.5% gain. Support services company Brumbles surged as an infrastructure firm Asciano and a transport group Toll Holdings were identified building up stakes in a rumored attempt to bid for the company according to Herald Sun. Brumbles surged impressive 10.9% and became second largest index mover of the day. Comonwealth Bank of Australia represented today?s rallying banking industry with a 1.8% gain. The index closed 115.8 points higher at 6100.8.

[B][U]Bond Market[/U][/B]

The 10-yr yield was more sensitive to domestic data than ASX taking rather modest positive lead at the open, but surging after the RBA hike. The yield held firmly above 6% benchmark after the event and closed at 6.012%, up 5.2 bps on the day.