Australia: After the major selloff in equity markets on Thursday worldwide a temporary reprieve occurred on Friday evening as the US non-farm jobs data for July saw 117k jobs created versus predictions of only 85k. This sent the US markets up strongly at the open of trading but then a wild day of trading ensued with the Dow up 0.5% at the close, S&P500 down 0.1%
and NASDAQ down 0.9%.

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Earlier European markets had fallen further with losses of 2.8% in Germany and 2.7% in London. The VIX index that measures volatility touched its highest level since May, 2010. The US unemployment rate fell from 9.2% to 9.1% largely due to a fall in the participation rate from 64.1% to 63.1% as more people became discouraged about looking for work. Investors piled into the safety of US government securities in reaction to the high volatility and yields came down initially and then finished slightly higher on the day.

We expect the AUD could trade in a wide range over the next several days as the effects of the US downgrade are digested by the market. Adding to the mix Chinese officials have called for a new reserve currency to replace the USD.

Majors: The S&P’s decision is controversial since Moody’s and Fitch reaffirmed their AAA rating last week and the US Treasury did dispute some of their assumptions in their model which project net US government debt will rise from 74% of GDP at the end of 2011 to 79% in 2015 and 85% in 2021. They also have also placed a negative outlook on their rating since they believe the size of the budget cuts (US$2.1-2.4 trillion over 10 years) are inadequate and the political bickering that was so evident in raising the debt ceiling gives them no confidence US politicians will agree to meaningful changes.

In Europe, it appears the ECB will start to enact their own version of buying some Italian and Spanish bonds after their rather strange move last week of buying Irish and Portuguese securities. Investors will need to keep an eye on any signs of further intervention in currency markets as there may be further moves this week. Last week the Bank of Japan tried to stop the appreciation of the yen with only some success but this week all eyes will be on the USD which may be subject to selling pressure.

Economic Calendar
AU ANZ Job advertisements JULY
JPN Bank Of Japan Monthly Economic Report
JPN Trade Balance and Current Account JUL
EU Sentix Investor Confidence AUG