Stocks and bonds rallied again on Friday night along with gold and oil. That’s a weird combination that was set to underpin the ASX in trade today, and which took the Aussie dollar up to 75 cents at one point on Friday.
But the election result, and the uncertainty around who will form government and what governing in the House and Senate has weighed on the Aussie dollar in early trade and is likely to mean the ASX 200 will undershoot the 32 points the SPI futures were suggesting the physical market could rally today. Banks could be interesting.
Here’s the scoreboard (7.57am):
- Dow: 17949 +19 (+0.11%)
- S&P 500: 2103 +4 (+0.19%)
- SPI200 Futures (September): 5,235, +32 (+0.6%)
- AUDUSD: 0.7455 +0.0040 (-0.6%)
Now, the Top Stories
1.Australia is one step closer to losing its AAA rating. Part of the orthodoxy of politics at a state and federal level for years has been that AAA credit ratings are sacrosanct. I’m not one who believes that if the cost is important infrastructure projects. When debt rises for this reason, one which in the end increases the productive capacity of an economy, tolerance for that rise in debt is relatively high.
But, Australia’s increase in debt and deficits is not being fuelled by increase in productive capacity but by the simple fact that the government, either side, has been unable to undertake the necessary reform to balance the books.
You’ll have noticed that during the election campaign both sides have moved beyond the budget period of four years to talking about forecasts over the next 10 years. No one believes the treasury, and government, which has consistently missed the one and two year targets can actually forecast a 10 year return to surplus. Neither do the credit ratings agencies. So even though the big three have recently affirmed Australia’s ratings they have sounded warnings about debt and deficits. The uncertain outcome of the election means there is a strong chance that reform is off the agenda for another 3 years means Australia’s AAA rating is clearly at risk of downgrade.
2. The Australian dollar is under pressure after the election and is down half a cent. 2016 is the year of uncertainty and the result of the Australian elections impact on the Aussie dollar is just another example of that uncertainty weighing on markets. So far this morning the Aussie dollar has been sold and is currently down more than half a per cent at 0.7443 for a loss of around 0.7%.
Key here is that traders are betting the delay before we know who will be able to form government, what that government will look like, and the make of the Senate all mean that the government, and governing in the term of this parliament is likely to generate outcomes that have a high chance of sub-optimal for the long term health of Australia and its economy.
But Kymberly Martin from BNZ Wellington says in the long run the Aussie is driven by global forces. I’ve got more here.
3. Stocks could come under pressure too – especially the banks.
The close of ASX futures on Saturday morning was suggesting a pretty solid day day with the September SPI 200 contract up 32 points.
But there is a strong chance that the market undershoots that lead. The banks now have a non-trivial risk of a Royal Commission into their conduct (even if Malcolm Turnbull does end up as prime minister), while the market overall could feel the weight of political uncertainty and the risk that this dampens business and consumer confidence, spending, and investment. But copper, iron ore, oil, and gold are all higher so the materials and energy sector may be do well enough to hold the market up while gold miners should get a double whammy of higher gold and lower Aussie dollar.
So it’s not all bad news by any measure. Traders will be watching a break of 5200 – if that gives way things could get ugly.
4. And the reason for all of the above is because political gridlock is now a real risk to Australia’s economic outlook. Warren Hogan has a neat piece on BI this morning which walks through all of the key risk points and potential impacts from the outcome of the election for the economy.
It’s a great piece but from a trader perspective this paragraph sums things up nicely:
For international investors and financial market participants the proximity of Australia’s election shock to the Brexit vote will strike a chord and highlight that Australia faces similar political challenges to other developed economies. As a capital-dependent country, this could be both a help and a hindrance.
You can read Warren’s full piece here.
5. Enough of Australia – the foreseeable future of the global economy has nothing to do with the economy. Bob Bryan has an interesting piece citing Blackrock’s 2IC Byron Wein, Citibank, and BAML among others who all follow the theme that the US and global economy is being buffeted by outside forces.
Bob says essentially, it’s the idea of “decent fundamentals, but heightened geopolitical risks.” High on the list is the US election and the fractured nature of global politics means that Hillary Clinton could be far from a lock on the presidency with Donald Trump a real chance.
The story is worth a look. The key insight is that there are a number of events which have economic effects, but they’re not economic occurrences.
6. US 10-year Treasuries hit their all-time low on Friday night. US 10’s traded to their lowest level ever on Friday night. That level, around 1.38%, came even as the stock market rallied and the S&P finished above 2100. That’s just 1.5% from its all time high.
Normally these moves wouldn’t make sense. But you don’t need to be Archimedes to square that circle. Bonds yields, in the US and around the globe, are down because there is still plenty of uncertainty about the economic outlook. More importantly though central banks in the UK, EU, Japan, and Australia are expected to further lower cash rates. That means the anchor point for bonds is falling pushing traders and investors further out the curve and putting downward pressure on longer bonds. That in turn means – as the Fed said just a couple of weeks back, that while stocks may seem over valued on historical PE terms they aren’t over-valued compared to bonds.
Now we wait for non-farms on Friday to see if it’s all going to unravel.
And of course here’s my outlook for the week ahead.
Key data for the past 24 hours (with thanks to BNZ markets)
JP: Tankan Large Manuf Outlook, Q2: 6 vs. 4 exp.
CH: Manufacturing PMI, Jun: 50.0 vs. 50.0 exp.
CH: Non-manufacturing PMI, Jun: 53.7 vs. 53.1 exp.
CH: Caixin manufacturing PMI, Jun: 48.6 vs. 49.2 exp.
JP: CPI ex fresh food, energy, y/y%, May: 0.8 vs. 0.8 exp.
UK: Markit manufacturing PMI, Jun: 52.1 vs. 50.1 exp.
EZ: Unemployment rate, May: 10.1 vs. 10.1 exp.
US: ISM Manufacturing, Jun: 53.2 vs. 51.3 exp.
US: Construction spending, m/m, May: -0.8 vs. 0.6 exp.
AU: Federal Election: undecided, counting to continues
You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
The question for traders this morning is whether the election result (or lack thereof) is going to put a dent in what would otherwise have been a solid start for the week. A negative market reaction is possible but not a given. Political uncertainty translates into a background and difficult, to quantify risk factor.
The big banks will probably be a good test of early market sentiment. Potential buyers may be a bit nervous until there is some clarity on the result. If there is going to be any sell Australia sentiment from international investors, the big banks will be in the firing line. Apart from the general uncertainty and economy unfriendly political environment created by a hung parliament, big business and big banks in particular face a difficult environment. Issues like negative gearing and Royal Commissions lurk as potential future negatives for shareholders.
Ric Spooner, chief market analyst, CMC Markets. You can follow Ric on Twitter @ricspooner_CMC