By Chris Zappone
Australian shares soared the most in almost half a year after the US Government's bailout of mortgage giants Fannie Mae and Freddie Mac helped calm investor worries about global market turbulence.
The benchmark S&P/ASX 200 index ended the day up 190.4 points or 3.9% at 5067.5 points, with banks leading the gains. The gain marked the biggest one-day jump since March 25.
Shares in NAB, which has the largest exposure to Fannie Mae and Freddie Mac, soared $1.50, or 6.4%, to $25.10.
The ANZ Bank leapt $1.34, 8.2%, to $17.60, while the Commonwealth Bank rose $3.28, or 7.9%, to $44.87 and shares in Westpac advanced $1.23, or 5.3%, to $24.58.
"It's a fairly unique situation," said Macquarie Group banking analyst Ben Zucker. "This is good news on the debt side for anyone who's exposed to Fannie Mae and Freddie Mac's debt-related paper."
Mr Zucker said the possibility of a government bailout of Freddie and Fannie had increased as the US mortgage market wilted. "Is it good for the stability of the broader system? Yes, it should be."
The US Government announced yesterday that it would take over the two mortgage companies, which own or guarantee almost half of the country's $US12 trillion ($14.8 trillion) in outstanding home mortgage debt. Defaulting sub-prime mortgages sparked what has become a global credit crunch that is still unresolved more than one year on.
Over-reaction
"The market's reaction has been quite strong in relation to what you would have expected," said RBC Capital Markets currency strategist Sue Trinh, who said the market first expected the intervention in July. "You could call it a knee-jerk reaction that has gone a little too far."
"It will be interesting to see what London and New York do with it," when those markets open, she said.
Earlier, Dow Jones futures jumped to 213 points, suggesting a strong open on Wall Street this evening.
The Australian dollar shot up 2.4%, in a rebound from last week's one-year lows against the greenback, gaining 2 US cents, to trade recently at 83.16 US cents, reversing part of last week's losses. Against the yen, the Australian dollar surged as much as 4.6%, to hit 90.90 yen.
RBC's Ms Trinh there was no connection between the surging Australian dollar and the outlook for commodities prices, which remained "pretty mixed at the moment," she said.
The Morgan Stanley Commodity Related Index of 20 mining, energy and agricultural companies declined 13% in July and August as the slowing global economy cut demand for raw materials, according to Bloomberg data. Strong commodities prices traditionally benefit the Australian dollar.
In the resources sector, global miner BHP Billiton gained 60 cents, or 1.6%, to $37.60, while its takeover target Rio Tinto added just 17 cents, or 0.2%, to $110.25.
Origin Energy, Australia's second largest power retailer, zoomed upward by $2.00, or 12.8%, to $17.65 as it unveiled a $9.6 billion liquefied natural gas (LNG) joint venture with US-group ConocoPhillips.
Oil and gas producer Woodside Petroleum improved $2.23 to $58.21, and Santos put on $1.29 to $18.75.
Incremental Petroleum was 20.5 cents heavier as Cooper Energy launched a $104 million takeover offer for Incremental in a bid to create a mid-tier oil and gas producer. Cooper shed 0.5 cents to 42 cents.
Stevens applauds rescue
Reserve Bank Governor Glenn Stevens said saving Fannie Mae and Freddie Mac would provide needed stability and confidence to global financial markets, although he was unsure of its direct effect on Australian banking.
"I don't really know what that would do to off-shore funding costs for Australian banks," Mr Stevens said addressing a Federal Parliamentary committee this morning. "I can't imagine it will worsen the situation though.''
In his prepared comments to the committee, Mr Stevens predicted inflation will remain "uncomfortably high for a little while yet." The RBA expects rising consumer prices to peak at 5% in the September quarter where they will stay for until the December quarter. "This is higher than expected six months ago," he said, explaining that falling oil and food prices will likely ease and inflation will climb down in 2009 and 2010.
The high inflation projects come as the economy shows other signs of slowing.
Australian job-vacancy advertisements had their largest fall in more than seven years, adding to signs that employers will pare hiring as economic growth slows.
Jobs advertised in newspapers and on the Internet dropped 4.9% from July to an average of 249,114 a week, following a 0.3% fall in June, according to ANZ Bank, marking the largest decline since February, 2001.
Problems linger
Despite today's share market gains, analysts say the bailout does not mark a turnaround in US real estate-relate problems at the heart of the weakness in global banking.
Locally, that means National Australia Bank's exposure to $1.2 billion in US housing relating-related debt will remain unchanged, Austock banking analyst John Buonaccorsi said.
"I don't think this will allow NAB to write back $200-$300 million of $1 billion in provisions it has announced."
The four major Australian banks also hold between $100 million and $300 million each in debt related to US non-bank mortgage lender Countrywide.
Mr Buonaccorsi also questioned the market's reaction the bail-out by the US government which had been expected for months. "It's not news as much as a confirmation," he said. "The government had to do something."
The reassuring fact regulators have acted overshadows the underlying need for action brought about by a problem with the financial system, Mr Buonaccorsi said.
Shaw Stockbroking's Jamie Spiteri also took a negative assessment of the rescue.
"Looking beneath the actual decisions, it's probably to some degree an admission of the situation and that the problems are severe," he said.
"Previously a lot of the commentary was supporting both of these groups were financially viable and didn't need government assistance. Now they're basically saying 'Yes, they do.'"
"If you were to look at it more broadly, it probably shores up the short-term uncertainty, but illustrates the severity of the problem."
czappone@fairfax.com.au
BusinessDay, with Jacob Saulwick, Sydney Morning Herald, and agencies