Global equities enjoyed their first positive week in a month, largely on the back of U.S. fiscal stimulus hopes – and despite polls suggesting Biden is now even more likely to win the Presidential election following a steady performance in last week’s debate. Of course, the week ended with Trump contracting COVID-19 which, while initially causing market jitters in Asian trading on Friday, was soon forgotten by Wall Street given he seems to have made a speedy recovery – and because it’s still salivating over the prospect of more stimulus.
Risk-on sentiment saw the strengthening $US give ground last week, which in turn supported gold prices. Bond yields also edged higher, with U.S. 10-year yields reaching 0.7% – or the top end of its range since spiking to over 1% in early June. Of interest in coming weeks will be whether U.S. yields continue to push on if risk-on equity sentiment prevails – or if (perhaps due to central bank intervention) they remain suspiciously low.
Overall, U.S. economic data continues to show an economy recovering reasonably well, albeit with the pace of recovery slowing (as seemed inevitable) over recent months. Encouragingly, weekly jobless claims fell a bit more than expected last week, and while overall employment growth in September was somewhat weaker than expected (at +660k), this appears partly related to seasonal quirks around public school employment (which, due to ongoing closures, did not bounce back as much as usual in September). Private sector employment rose by 877k, and the unemployment rate dropped to 7.9%, from 8.4%. The recovery in U.S. employment is outlined in the chart below.
Globally, there’s little in the way of major new data, so focus will remain on U.S. fiscal stimulus talks and the upcoming election. Trump, it seems, is shrugging off COVID – and whether this has more harmed than helped his polling with be an interesting additional focus this week.
Local equities are currently trying to anticipate how U.S. stocks will react to election news that, taking place in the U.S. evening, is breaking in the Asian trading zone – such as last week’s debate and Trump’s COVID news. Both events last week weighed on Asian markets, but were then shrugged off by Wall Street as it was more focused on stimulus talks. All up, our market ended down last week but surged back yesterday.
Over the past six months more broadly, however, our market has lifted by only half the 30% rebound in global stocks. A ‘shift-share’ sector analysis suggests this reflects underperformance by local financials and health care stocks compared to global peers, along with our overall overweight market exposure to the underperforming financial sector and our underweight exposure to the outperforming technology sector.
In terms of the week ahead, the Federal Budget and RBA meeting loom large. The big budget news in recent days has been reports that tax cuts could be backdated to take effect from 1 July, which is a good way to provide both the tax cuts and immediate cash in consumer pockets. The deficit, of course, will be huge – at somewhat more than $200b or 10% of GDP this financial year. As regards the RBA, the market is attaching only a 40% probability to a rate cut today, and recent (likely well-sourced) media reports suggest the RBA won’t move this week. Given ongoing gradual recovery and evidence of more fiscal stimulus in the pipeline, the RBA may well feel it does not need ‘to be seen doing more’ today, and let the focus remain on Canberra.
Have a great week!
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