The Australian Recovery Is Not Convincing

The Australian markets recovered today on the strong lead from US. However, while bond yields, equities and dollar closed in black today, the recovery was not convincing. Both ASX and the yield failed to hang on to the gains that they had at the open suggesting that the bearish momentum will be very difficult to beat and will require a major reversal of investor sentiment for stabilization and further gains to ensue.

[B]Stock market correcting - Costello[/B] - The Federal Treasurer Peter Costello did not deny that there is clear economic instabilities in the global capital markets. However, he remained optimistic about the Australian equities index, stating that the huge fall seen yesterday was a correction in prices after extraordinary growth this year. He noted that a five percent correction was indeed huge, but since January the ASX stands at a 7% gain. The treasurer declined to comment on the effect of the financial market volatility on the upcoming RBA decision. The market is expecting a 62% chance of a hike, spurred by high demand for borrowing and a spike of inflation. However, last week the market was pricing in an 86% chance before the tumble in the capital markets. Source: Herald Sun,21985,22176649-5012062,00.html
[B]Alumina reports $600m cost hike[/B] - The mining industry is plagued by the increasing capital costs. The US aluminum giant Alco and its Australian partner Alumina announced a $600 million cost increase on their Juruti development and refinery expansion in Brazil. Alumina also reported a 10% decrease of its first-half profit. Additional hits came from the appreciation Australian dollar, rising operations and freight costs and lost production due to strike in Guinea. However, the underlying fundamentals of the industry remain strong with rising global demand for aluminum products driven in large by China. Source: The Australian.,25197,22173941-5005200,00.html
[B]Transfield abandons takeover of GRD[/B] - Transfield Services, provider of asset and project management, has abandoned the proposed takeover of resource contracting and developing company GRD. Transfield said it had not been granted access to sufficient amount of materials on GRD and was not able to perform reliable valuation and conclude whether the takeover would benefit its shareholders. GRD chief executive Cliff Lawrenson said that careful value analysis has let the board to conclude that it was on in the best interest of GRD?s shareholders to accept Transfield?s proposal and hence declined the latter to undertake the due diligence. Source: Herald Sun,21985,22175928-5012062,00.html
The Aussie is slowly rising as the equity markets have shown signs of recovery as Dow rallied at the end of the session and gained 1.14% at the close. The Australian Federal Treasurer Costello rushed to proclaim that the recent tumble in the Australian equities specifically is a necessary correction, and the index is still up 7% on the year with fundamentals supporting further strength. The carry traders that were hoping the Dow and S&P are bouncing off the support trend line rushed back into their positions resulting in strong gains in all yen, AUDJPY being one of the biggest winners. Fundamentally, the only economic release today was RBA Commodity Index that printed at 4.4% versus revised prior 7.3%, lowest since February 2004. The release did not have profound impact on the Aussie. The fate of the currency remains in hands of the global financial stability.

[U][B]Stock Market

[/B][/U]The ASX recovered after the strong US lead, gaining back as much as 1.4%. The big banks were in the lead on the optimistic outlook of stability. However, the equities tumbled around 11 PM EST on Wednesday and fell to 5900, below yesterday?s close. The media did not offer formal explanation. Rumors blamed profit taking and Australia?s military involvement in Afghanistan, where they will be helping free South Korean hostages. The unsatisfactory profit report of Alumina that downgraded its annual profit outlook by 14% as rising costs wiped the benefits of high commodity prices and a projected annualized 10% increase of global aluminum demand has certainly contributed as well. The largest index movers were National Australia Bank (up 2.4%), Commonwealth Bank of Australia (up 1.8%) and QBE Insurance Group (up 4.1%). While the short term trend remains strongly negative, the ASX recovered 70.6 points today and closed above the 6000 benchmark at 6011.8. The market is still waiting for profit reports from large companies, such as BHP Billiton. The analysts expect strong figures to end the ASX nightmare, while weaker figures would translate into more losses.

[B]Bond Market
The bond yield offered a mixed picture today. It has certainly taken a strong positive lead from the recovering global equities, and has mimicked the movements of the ASX throughout the day. The yield gained 2.6 bps closing at 5.945%, but failed to show the recovery at the end of the day that the ASX had.