Australia's budget sees mixed reaction

The reaction to Australia’s budget, announced overnight, has dominated Asian trade with most analysts feeling the outcome wasn’t quite as aggressive as initially thought.

While most of the details were leaked prior to the announcement, there were a couple of surprises from the budget. Indeed the budget was austere; it did bring increased spending on infrastructure investment. Some of the key revenue drivers will be the re-indexation of the fuel excise tax and a temporary budget repair levy on high income earners (over 180,000 a year).

Meanwhile, cuts to schools and hospitals along with family tax benefits systems will be the main savings. All this means that the RBA is unlikely to be hiking rates for a while, with some analysts feeling there will be no change in rates through 2014 and 2015. It almost seems the government has deliberately gone very conservative with its estimates. Looking at unemployment for example, the government expects it to peak at 6.25%. Just from recent trends it seems the jobs market is on the mend and therefore unemployment is likely to peak at lower levels.

AUD rallying in Asia

Due to the fact the budget was mostly priced in, AUD/USD has actually been quite resilient and is testing 0.94 in Asia. It’s also important to note that this budget is likely to result in a fiscal repair of Australia’s books, in which case local bonds will only look more attractive to the international community. This could ultimately give the AUD some further upside. The 0.94 barrier has significant stops in that region, with plenty of traders having positioned for AUD downside post budget. The failed break lower could see stops triggered in the 0.94 region which would lead to further near term gains.

ASX 200 weighed by dividends

Australian equities have been mixed today, with investors focussing on CBA’s result and a chunky dividend coming out of the market. Another stellar set of earnings for CBA saw its stock trade at a fresh record high today, well above the $80 mark where it has stuttered in the past. ANZ also caught a tail wind off the result and pushed higher, while WBC, NAB and MQG struggled as they traded ex-dividend.

Apart from the banks, the other big story in the equities space has been a plunge in Sonic Healthcare and Primary Healthcare shares. The establishment of the medical research fund was the big surprise and analysts feel the $7 contribution on visits to the GP will result in a drop in patient volumes. The rebate is unlikely to make up for the drop in volumes. We have already started seeing some downgrades to SHL and PRY today. To put it into perspective, around 90% of PRY’s earnings come from government spending. As a result, PRY really has to hold the $4.50 level in the short term to prevent further falls as this level is key support.

Europe pointing higher

Looking ahead to European trade, we are calling the major bourses firmer with US markets remaining at record highs. The DAX will once again be testing all-time highs with focus on CPI for France and Germany along with industrial production for the region. Sterling will be an interesting currency to watch after having descended quite significantly from highs just shy of 1.70 against the greenback.

Cable printed a low of 1.682 overnight and continues to hang around those levels. There is a busy day ahead on the economic calendar with UK jobs, the BoE inflation report along with a Governor Mark Carney speech. The data and commentary could come in fairly hawkish and this would result in a cable recovery.

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