Australia: Concerns over the continuing debt crisis in Europe and the fear that the US may not come to an agreement about raising the debt ceiling in the region, saw risk aversion trading during the offshore session; with the AUD reaching a low of USD1.0561 overnight.

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Equity markets in the US and Europe were both lower, with US equities down as much as 1.5% early on in the trading session. They recovered to only be down 0.8% (DOW & S&P 500), as reports came out that the US may be moving closer to some kind of plan to raise the debt ceiling.

Republicans are planning to put forward an USD2.4trillion ‘cut, cap & balance’ plan, but this is unlikely to be passed in the senate. Therefore the back-up plan is being proposed which will allow President Obama to increase the debt ceiling in 3 stages, until the presidential election in 2012. As mentioned above, local investors will be paying close attention to the minutes from last month’s RBA interest rate meeting; especially since the markets are now pricing in an interest rate cut of 25bps by the end of 2011.

Previous statements outlined their continual concerns over the international developments and problems in the offshore economies, but recently our poor retail sales and housing data has seen concerns shift to the growth in our local economy. In the past the RBA has stated that they still see that the growth in the medium term will be on trend or higher and that they maintain a medium term tightening bias; so it will be interesting to see if their stance on these area’s change at all. Markets will be paying close attention to the release and could see the AUD fall further if there is any change in the language to suggest that an interest rate cut is more likely.

Majors: The EUR/USD was weaker, but rebounded off USD1.4000, as the markets digested the results of the bank stress tests. Many are
concerned that the tests weren’t stringent enough, and that they didn’t include the potential of Greece defaulting; which makes it hard for
investors to take much out of the results.

Contagion concerns are the main focus as the EU leaders meet on Thursday to further discuss the crisis. Investors are cautious in the lead up to the meeting with fears that the meeting may come and go without finalising terms for a second Greece bailout.

Economic Calendar
AUST RBA Board Minutes
US Housing Starts Jun
US Building Permits
US Fed Hoenig Speaks

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