With Canberra in chaos, the ASX is sinking

(David Rogers / Getty Images)
  • The ASX200 is down almost 1% in midday trade following another wild morning in federal politics.
  • While not linking the decline directly to events in Canberra today, Richard Coppleson from Bell Potter Securities says markets loathe political uncertainty and the volatility will weigh on sentiment.
  • Chris Weston – Head of Research at forex broker Pepperstone – attributed the moves to large portfolio flows.

The ASX200 has been selling off sharply following another wild morning in Australian politics.

A short time ago, the local index was down almost 1% with falls in all the major sectors. Pre-market futures had priced only a tiny decline in early trade, but the selling accelerated through the morning in contrast to other equities markets in Asia, which are broadly steady.

Investing.com

As at 12:45pm AEST, there were 1.3% falls for the resources and material sectors, while the ASX200 financials index was down 1.18%.

Richard Coppleson at Bell Potter Securities — while not linking today’s price action directly to events in Canberra — said there was a degree of concern as markets assessed the increased likelihood of a Labor government.

“The market does not like political uncertainty, and the big worry is that if this infighting continues then that could mean that Bill Shorten becomes Prime Minister,” Coppleson said in an email to Business Insider.

“If Shorten won – many worry [it] will be bad for business & the economy.”

“The fear from those who have been around for a while is a Shorten government will refocus priorities (and spend) – which could very easily see unemployment go back up, while Australia’s debt increases at a faster rate as they spend on all their new promises,” Coppleson said.

“Australia then loses its AAA rating (which could see interest rates edge up), business stops investing, the share market tanks as profits fall & uncertainty over franking credits reigns, and the property markets takes another downward turn due to negative gearing uncertainties.”

“That leads to consumer confidence slumping – retail sales tumble and then all this then causes then Australian the economy to go into its first recession in 25 years. No wonder the market is nervous.”

Chris Weston, Head of Research at foreign exchange broker Pepperstone, said fears around a Labor government had been overblown when assessing this morning’s stock moves in a macroeconomic sense.

“You’ve got to sense-check things when there’s an external event like this,” Weston told Business Insider.

“If I sense-check the moves in markets — is the thematic tied back to a higher case of a Shorten government? Maybe — but the fact is the selling’s been broad-based across all spaces,” Weston said, noting the materials sector has seen bigger declines than the big banks.

“One place to look is the front end of the curve for Australian government bonds. If you look at the yield on 3-year government debt, there’s been absolutely no move,” Weston added.

He said that if markets did have genuine concerns about negative effects from the increased likelihood of a Labor government, one would think that would be reflected by a move in bond yields.

In addition, the Australian dollar has strengthened against the USD and S&P500 futures are little-changed.

In view of that, “nothing really makes sense here”, when looking at this morning’s selloff, Weston said.

“These moves look more like equity portfolio flows. It may be some large investors are liquidating stock after a strong period of out-performance”, Weston said.

He noted the ASX200 has been one of the best performers globally in 2018 — particularly since April as money has moved out of emerging market stocks amid a steady rise in the US dollar.

Coppleson, who also writes the daily Coppo Report on the stock market, added a successful leadership challenge by Peter Dutton is far from a done deal.

“The party room vote was big enough (48 – 35) to Turnbull, so that should give him breathing enough space at least until Christmas to turn the worm.”

“All this goes away if Turnbull can get some much needed policy wins that kill these leadership issues and then goes onto to win the next election.”

“I’d continue to stay cautious on the market over August and September. I still see it more likely that the market has seen its highs for now and will not be seen again until November-December.”

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