Global equities enjoyed their second successive positive week, suggesting the ‘correction we had to have’ may well be over. The main market driver last week was the on again/off again/on again U.S. fiscal stimulus talks. After earlier hopes of a deal were quashed by Trump, he ended the week arguing he now wants an even bigger stimulus than the Democrats were proposing! Bond yields edged higher and the $US weakened, with the latter giving gold a modest boost.
The other key news last week was polling suggesting Biden’s lead in the Presidential race has lengthened (Trump getting COVID-19 did not garner him many sympathy votes it seems, perhaps due to his more erratic than usual behaviour). While Biden poses a market risk in terms of potentially higher corporate taxes and/or regulation, Wall Street at this moment remains focused on the prospect of a big fiscal stimulus if a blue wave of Democrats hits Washington. The market is also viewing Biden’s big lead as reducing the risk of post-election court battles.
In terms of the week ahead, stimulus talks will obviously remain a focus. Ironically, however, it may be more a market positive if these talks drag on for weeks – even until after the Presidential election. As we saw with the U.S.-China trade deal saga last year, and Trump’s tax cut plans in 2017, the ongoing expectation of a positive event – a carrot dangling just ahead of investors – is often better than the event (or carrot) itself! Indeed, if Biden wins, a major new stimulus package might not eventuate until the new year – lots of time for the market to get really really excited.
Note also this week marks the start of the Q3 U.S. earnings reporting season. While the headline is negative – earnings are expected to decline by 20% on the same quarter of last year – the better news is that analysts have actually modestly upgraded earnings over the past few months. Indeed, Q2 earnings ended up better than feared and Q3 earnings have been revised up by 5% since end-June. As I pointed out in my latest Global Market Trends report, U.S. forward earnings have started to rise a little in recent months, as the market’s expectation for a solid 2021 rebound in earnings is still holding up.
What a week! After relatively lethargic movement in recent months, the S&P/ASX 200 popped 5.4% higher last week – with financials up a stunning 7.5%. While the local market was clearly buoyed by bullish global sentiment, the big spending Federal Budget also helped. Imagine if the RBA had also cut interest rates! As regards the Budget, however, it should be noted that there was only relatively modest net new stimulus – with most of the extra policy spending since the mid-year economic statement reflecting the already announced extension of JobKeeper. That said, the bring-forward of income tax cuts and the greatly widened scope for instant tax write-offs of capital expenditures is a positive for consumer spending and business investment respectively.
As regards the RBA, the debate now is whether its decision not to cut rates this month was all about not stealing the limelight from fiscal policy, or reveals it’s not yet convinced of the need for more stimulus. Maybe we all overreacted to Deputy Governor Debelle’s recent dovish speech?
Last week’s RBA’s policy statement wording is interesting, in that it says it “continues to consider how additional monetary easing could support jobs as the economy opens up further”. This could be taken to mean the RBA clearly wants to provide more stimulus, but is not sure how to do it – and is possibly not convinced cutting the official cash rate from 0.25% to 0.1% would do all that much (apart from possibly boosting sentiment, through there’s always a risk of a negative impact on confidence). As it stands, the market has now fully priced a cut in the cash rate to 0.1% next month. To my mind, while a cut seems likely, I’m not as certain as the market now is. Either way, we may learn more when Governor Lowe delivers a key speech on Thursday.
Other notable local events this week include the NAB and Westpac surveys of business and consumer confidence today and tomorrow respectively. Positive budget news and ongoing recovery outside of Victoria will be offset to an extent by the persistent disaster down in Melbourne.
Also critical for the RBA outlook will be the September labour market report on Thursday. Given a flattening out in the fortnightly official employment reports over recent weeks, the market anticipates a small drop in employment of around 35k after a dubious 111k surge last month – which partly appears to reflect a tightening up in Jobseeker payment eligibility. The unemployment rate is expected to lift from 6.8% to 7.1%, although the ‘effective’ unemployment rate – allowing for those employed but not working and those unemployed but still not actively seeking work – is closer to 9%.
Have a great week!
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