After threatening to break support at the late September low in the previous week, the S&P 500 rebounded last week to end near resistance at the mid-October high. The U.S. stock surge came despite what appeared lingering uncertainty over the U.S. Presidential election outcome. As we saw four years ago, it’s very hard to predict how the U.S. market will immediately respond to elections.
Wall Street appeared to become convinced quite quickly that Biden’s slim lead in key States would hold – given the strong showing in postal votes that continued to be counted – and that Trump’s threatened legal action would amount to nothing. Some solace was perhaps also taken from the fact that the Democrats did not also clinch a Senate majority (which will limit Biden’s intent to raise corporate taxes), though this still remains possible depending on the outcome of two required run-off elections in Georgia in early January.
On the economic front, meanwhile, U.S. economic news was generally upbeat – with a stronger than expected jobs gain and ISM manufacturing report for October – though a smaller than expected drop in weekly jobless claims.
Less comforting, U.S. COVID cases continued to mount, with more cities and towns tightening up social distancing restrictions (such as banning indoor restaurant dining) though without resort as yet to the draconian ‘shelter in place’ measures seen earlier this year. The Fed meeting came and went, with Powell again promising to do more quantitative easing if necessary.
In terms of the week ahead, an early focus naturally will be on the strength of Trump’s lawsuits – and whether these threaten to rekindle election uncertainty. With little critical U.S. economic data, COVID developments will also be in focus, as will any hints on the size and timing of a Biden fiscal stimulus plan for the new year. COVID and Trump remain risks, but otherwise markets may well continue to ‘buy the rumour’ of an impending fiscal boost.
There was also excitement aplenty on the home front last week, with the Reserve Bank unleashing its widely anticipated suite of further stimulus measures. The upshot is that the RBA is intent on keeping short and long-term interest rates very low for at least a year or so, even as the economy recovers and even at the risk of sparking speculative fervour in the property market.
Indeed, the RBA’s aggressive action came despite an upgrade to its economic growth outlook in Friday’s quarterly Statement on Monetary Policy (it now expects the unemployment rate to be 6.5% at the end of next year, rather than 8.5%). Economic data was also encouraging, with a strong gain in building approvals, home lending and ANZ job advertisements. House prices also rose modestly in October for the first time in six months. Retail sales, however, did correct back for the second month in a row in September, though overall sales volumes rebounded strongly in the quarter after the steep June quarter loss.
Melbourne is also gradually opening up again!
It’s no surprise therefore that the S&P/ASX 200 rebounded last week to again be testing the top of its range since early June. We could be on the cusp of a breakout.
We may also get further encouraging news this week through the NAB and Westpac measures of business and consumer sentiment on Tuesday and Wednesday respectively. Given the improving outlook in Melbourne and further recent stimulus from both the Federal Government and Reserve Bank, it would not be a surprise if these surveys revealed both business and consumers were feeling more confident.
Have a great week!
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