Scenarios: Australian markets brace for post-election selloff
By Mark Bendeich
SYDNEY | Sun Aug 22, 2010 5:40pm EDT
SYDNEY (Reuters) - Australian shares and the local currency are set for a sell-off on Monday after a weekend election appeared to have realized investors' worst fears -- a minority government and big swing of votes toward Green MPs.
Following are likely impacts on the Australian dollar, the local share market and domestic interest rates on Monday:
THE AUSTRALIAN DOLLAR
- The local currency is likely to fall in the short term, but analysts disagree on just how far it will slip. It tripped up anyway last week on renewed global economic concerns, but some economists and traders feel it could slide another 1-2 cents in the next few days. The Australian dollar closed offshore on Friday at $0.8940, and could initially test support at around $0.8840-60 on Monday. If it breaks through that, the next stop could be $0.8780, the 55-day moving average, and then $0.8575, which has often been a pivot point for the currency this year.
More optimistic analysts do not expect investors to hit the panic button, given the Australian dollar remains a high-yielding currency underpinned by a robust economy with relatively little debt and a strong exposure to the irrepressible Chinese economy.
SHARE MARKET - PERHAPS NOT ALL BAD
WIDER MARKET - Shares were already set for a weak Monday before Australians went to the polls.
On the eve of Saturday's election, the futures market was betting the benchmark S&P/ASX 200 index to fall, in line with a weaker finish on Wall Street and softer metal prices, with the September contract standing about 1 percent below the physical index.
MINING SHARES - There might be a silver lining in the uncertainty for the mining sector.
If opposition leader Tony Abbott forms a conservative minority government, he has promised to scrap the ruling Labor party's planned 30 percent tax on iron ore and coal mines.
So big miners such as Rio Tinto and BHP Billiton, the world's second-largest and third-largest producers of iron ore, may outperform the market in coming days, if Abbott looks like winning over a sufficient number of independents.
Other miners that would benefit from Labor's demise include Macarthur Coal, Centennial Coal, Fortescue, Mount Gibson Iron and Atlas Iron.
TELSTRA CORP - Australia's largest phone company has perhaps the biggest political exposure outside of the mining sector -- except it's not clear to investors whether it would do better under a minority Labor or conservative government.
Prime Minister Julia Gillard's Labor party has promised to build a $38 billion national fiber-optic broadband network, with the government paying Telstra A$11 billion ($9.8 billion) so it can use the firm's fixed-line assets as the network's backbone.
A conservative government would abandon the project, which would deprive Telstra of the cash but leave it with its quasi-monopoly over Australia's fixed-line phone network.
Investors cannot agree if Telstra would be better off with the cash or the status quo.
INTEREST RATES
Market interest rates are the least likely market to react badly, given Australia has relatively little government debt and it would be difficult to see the political uncertainty resolving itself into a minority government intent on wanton spending.
Both major parties have promised voters they would return the budget to surplus in three years. There is the prospect, however, of a move higher at the short end if investors suspect Labor and the opposition would be prepared to make rash spending promises in order to secure the support of cross-benchers.
By Mark Bendeich
SYDNEY | Sun Aug 22, 2010 5:40pm EDT
SYDNEY (Reuters) - Australian shares and the local currency are set for a sell-off on Monday after a weekend election appeared to have realized investors' worst fears -- a minority government and big swing of votes toward Green MPs.
Following are likely impacts on the Australian dollar, the local share market and domestic interest rates on Monday:
THE AUSTRALIAN DOLLAR
- The local currency is likely to fall in the short term, but analysts disagree on just how far it will slip. It tripped up anyway last week on renewed global economic concerns, but some economists and traders feel it could slide another 1-2 cents in the next few days. The Australian dollar closed offshore on Friday at $0.8940, and could initially test support at around $0.8840-60 on Monday. If it breaks through that, the next stop could be $0.8780, the 55-day moving average, and then $0.8575, which has often been a pivot point for the currency this year.
More optimistic analysts do not expect investors to hit the panic button, given the Australian dollar remains a high-yielding currency underpinned by a robust economy with relatively little debt and a strong exposure to the irrepressible Chinese economy.
SHARE MARKET - PERHAPS NOT ALL BAD
WIDER MARKET - Shares were already set for a weak Monday before Australians went to the polls.
On the eve of Saturday's election, the futures market was betting the benchmark S&P/ASX 200 index to fall, in line with a weaker finish on Wall Street and softer metal prices, with the September contract standing about 1 percent below the physical index.
MINING SHARES - There might be a silver lining in the uncertainty for the mining sector.
If opposition leader Tony Abbott forms a conservative minority government, he has promised to scrap the ruling Labor party's planned 30 percent tax on iron ore and coal mines.
So big miners such as Rio Tinto and BHP Billiton, the world's second-largest and third-largest producers of iron ore, may outperform the market in coming days, if Abbott looks like winning over a sufficient number of independents.
Other miners that would benefit from Labor's demise include Macarthur Coal, Centennial Coal, Fortescue, Mount Gibson Iron and Atlas Iron.
TELSTRA CORP - Australia's largest phone company has perhaps the biggest political exposure outside of the mining sector -- except it's not clear to investors whether it would do better under a minority Labor or conservative government.
Prime Minister Julia Gillard's Labor party has promised to build a $38 billion national fiber-optic broadband network, with the government paying Telstra A$11 billion ($9.8 billion) so it can use the firm's fixed-line assets as the network's backbone.
A conservative government would abandon the project, which would deprive Telstra of the cash but leave it with its quasi-monopoly over Australia's fixed-line phone network.
Investors cannot agree if Telstra would be better off with the cash or the status quo.
INTEREST RATES
Market interest rates are the least likely market to react badly, given Australia has relatively little government debt and it would be difficult to see the political uncertainty resolving itself into a minority government intent on wanton spending.
Both major parties have promised voters they would return the budget to surplus in three years. There is the prospect, however, of a move higher at the short end if investors suspect Labor and the opposition would be prepared to make rash spending promises in order to secure the support of cross-benchers.