SYDNEY (Reuters) - The Australian dollar fell one percent and bonds eased in early trade on Monday after an inconclusive election appeared to have delivered investors’ worst fears -- a minority government with power thrust on a handful of independent MPs.
With neither of the major parties winning an overall majority in Saturday’s election to form a government, vote counting is set to continue for several days and leaves the prospect of the first hung parliament in 70 years.
In early Pacific trade, the Aussie hit a low of $0.8833 from Friday’s close at $0.8940, before recovering slightly to trade at $0.8871 at 6:06 p.m. EDT.
Markets were looking vulnerable even without the election uncertainty because of weak stock markets overseas on Friday and continuing concerns about the economic recovery.
Australian stocks are also expected to lose ground, although moves may be limited to certain stocks including mining shares such as Rio Tinto and BHP Billiton on uncertainty over a planned mining tax and telecoms giant Telstra on government plans for a broadband network.
“I think the markets will be a bit soft but I don’t think the election uncertainty will be a great pull on the market,” said Michael Heffernan, senior client adviser and strategist at Austock Securities.
“There have been plenty of countries around the world with close elections and we are a democracy ... and investors realize this,” Heffernan added
Initial support for the Australian dollar is seen around $0.8820/40, below which 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.
Australian share index futures are down 9 points to 4,387 a 43.9 point discount to the close of the underlying S&P/ASX 200 index on Friday.
Australian bonds are softer, with three-year futures down 0.03 to 95.49, while the ten-year contract dipped 0.04 points to 95.055.
With nearly 80 percent of votes counted, a hung parliament was most likely, with two possible scenarios for a minority government: a conservative administration backed by rural independents or a Labor government backed by Green or green-minded MPs.
The latter scenario is frightening for many investors, with Prime Minister Julia Gillard indicating on Sunday after early talks with independent and Green MPs that she was open to discussing the policies of this disparate group of lawmakers.
The independent and Green lawmakers who have emerged from the election stand for everything from higher income and company taxes, in the case of the Greens, to more open government and fewer banana imports, in the case of two independents.
Treasurer Wayne Swan sought at the weekend to reassure markets that the caretaker Labor administration could provide stability until a new government is formed.
“The investment and broader community can be assured that Australia’s economy is among the strongest in the world, with a stable financial system and world class regulators who have served both sides of politics very effectively,” he said.
Investors would prefer a minority conservative administration over a Labor-Green arrangement, UBS chief strategist David Cassidy said, noting that conservative leader Abbott had pledged to scrap Labor’s proposed 30 percent mining tax.
The tax on major iron ore and coal-mining operations has weighed on mining stocks such as BHP Billiton and Rio Tinto and the Australian dollar.
“Clearly the market won’t like the uncertainty,” UBS’s Cassidy said, predicting moderate selling. “Markets would be uncomfortable with a Labor government with Green assistance.”
Additional reporting by Gyles Beckford in Wellington and Balazs Koranyi in Sydney; Writing by Ed Davies
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