As has been long pointed out on Zero Hedge, the AUD carry pair (either with the JPY, USD or EUR) has been the primary driver of market funding over the past 3 months (we have also pointed out for about 15 weeks that fund outflows are the loud alarum bells for an upcoming stock crash, a topic finally picked up by the NYT). In which case, courtesy of the Australian hung parliament, the market may be in for some tumultuous moves when the forex market opens at 3 PM EST, and looks certain to cut the weekend of the Liberty 33 trading desk early as they plan preparations for what could be a broader based sell off driven by carry evaporation. Reuters explains why the AUD is expected to drop a cent or more when trading resumes: "Australia's two major parties wooed independent lawmakers on Sunday after an inconclusive election left the nation facing its first hung parliament since 1940 and set financial markets up for a sharp sell-off. The Australian dollar and shares are likely to slide when trading resumes on Monday, analysts said, with the vote count threatening to drag on for days and both the ruling Labour party and opposition seemingly unable to win a majority." In other words, with the market correlating nearly 100% with the AUD, all those who went long this market despite the second Hindenburg Omen confirmation in a week, may be in for a rude awakening.
More from Reuters:
"The uncertainty is going to be a real killer to the financial markets," said economist Craig James of Commsec, suggesting the local currency could fall a cent or more.
With 78 percent of votes counted, a hung parliament looked likely, with two possible scenarios for minority government: a conservative administration backed by rural independents or a Labour government backed by one or two Green or green-minded MPs.
In either case, former conservative treasurer Peter Costello said, Australia faces a shaky administration which could fall within 12 months.
"It's quite possible with an unstable situation like this that we could be back to the polls within a year," he said.
Investors would prefer a minority conservative administration over a Labour-Green arrangement, UBS chief strategist David Cassidy said, noting that conservative leader Tony 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. But he said markets would be most concerned about a Labour-Green government, given the Greens also would be strong in the upper house Senate.
"Markets would be uncomfortable with a Labor government with Green assistance," he added.
Courtesy of Mark's Market Analysis