The Aussie Recovers to 86 cents

The Australian markets continued their recovery, as global markets showed signs of stabilization. Risk appetite slowly returned to carry traders, rallying the Aussie by over 100 pips since yesterday?s US market open. The ASX was boosted by the strong earnings reports that started flowing in as well as commodities recovery. The 10 yr bond yield pushed above the psychological 6% level.

[B]Rate risk up on credit surge[/B] - Private sector borrowing is growing at fastest pace since 1989. The high income earners have rushed to get into superannuation ahead of June 30th, contributing A$5.5 billion in debt last month, the biggest monthly increase on record. While the borrowing rate is expected to cool off in the next month, the business and housing lending are also growing at uncomfortably rapid pace. RBA governor Glenn Stevens has justified the previous three hikes with the intention to cool off borrowing growth. The figures have boosted the expectations of a rate hike in August. Treasurer Peter Costello declined to speculate on the probability of a rate hike. Source: The Australian,25197,22164824-643,00.html
[B]Business Conditions Rise on higher profits[/B] - National Australia Bank?s (NAB) quarterly business survey showed that the business conditions index rose three points to 20 in the second quarter, indicating that 20% of the firms found the business conditions to be good. NAB chief economist Alan Oster attributed the rise of the index to strong profitability that climbed one point to 17 in the second quarter. Business and financial services, mining and property had the highest conditions, while retail, wholesale and transport were rated as having good conditions. Personal and recreational services were the only sector with weak and deteriorating conditions, with the growth affected by a smoking ban and higher currency. Source: Herald Sun,21985,22165030-5012062,00.html
[B]Santos ups stake in Bayu Undan[/B] - Australian oil company Santos has become second largest player in the Bayu Undan gas-stripping. The deposit is belongs to East Timor, located in the Timor Sea. Under the new arrangements, the largest player remains ConocoPhillips with 57.2% stake (previously 56.27), while Santos is second with 11.4% (up from 10.64%). Santos is the only Australian company that gained participates in the Bayu Undan joint venture. Company officials stated that the result fore the company is good, however Santos does not provide the breakdown for individual business units. Santos is also evaluating exploration results for a number of discoveries in the Timor Sea, considering a possible $6-10 billion expansion of Wickham Point to more than double its capacity by 2012. Source: The Australian.,25197,22161422-5005200,00.html

The 18 year high borrowing rate that printed today gave a new wave of speculations that the interest rate hike will happen. The private sector credit rose to 15.4% against the revised prior 14.5%. The business conditions also printed strong at 20 points for the second quarter 2007, up from prior 17. The news made headlines in the Australian press and analysts commented that this data boosts the expectations that RBA will hike quarter point in August. The flow of strong data coupled with careful return of the risk appetite by carry traders resulted in a strong recovery of the Aussie. The boost of commodity prices and the ASX index also helped. AUDUSD appreciated to 86 cents today, trading as high as 0.8614 in early Asian session.

[B][U]Stock Market[/U][/B]

The signs of stabilizing equity markets led by a 0.7% recovery of the Dow index, as well as higher metals have boosted the Australian equity index. The strong earnings reports came from several companies, such as gas producer Origin Energy and chemical manufacturer Cambell Brothers. The announced division of Qantas Airways into four separate businesses will provide greater transparency and was regarded good news by the market. Overall, the index was moved the most by Westpac Banking Corporation which was boosted by the release of record high borrowing from retail and business sectors, moving up 1.6%. BHP Billiton was the second largest leader of today?s gains, adding 0.6% to its equity value on stronger copper prices. Macquarie Bank was the third largest mover, up 3%. The index closed at 6144.2, up by 35.4 points.

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

The bond yield was moved the most after the open on gradual return to risk appetite and global equities recovery led by the Dow. The strong borrowing data did not impact the yield and it remained flat for the rest of the day. However, the initial push set it back above the psychological 6% level. The yield gained 0.6 bp and closed at 6.03%.