All things market related
By Shruti Yadav
Australian Gross Domestic Product (GDP) fell 7.0 per cent in the June quarter, the largest quarterly fall on record, according to figures released by the Australian Bureau of Statistics (ABS). This follows a fall of 0.3 per cent in the March quarter 2020.
The combined effect of the pandemic and the community and government responses led to movements of unprecedented size, not only in GDP but also in many of the other economic aggregates in the June quarter National Accounts. Head of National Accounts at the ABS, Michael Smedes said: “The global pandemic and associated containment policies led to a 7.0 per cent fall in GDP for the June quarter. This is, by a wide margin, the largest fall in quarterly GDP since records began in 1959.”
Private demand detracted 7.9 percentage points from GDP, driven by a 12.1 per cent fall in household final consumption expenditure. Spending on services fell 17.6 per cent, with falls in transport services, operation of vehicles and hotels, cafes and restaurants.
Tech sell off and low oil prices
The US tech led equity rout extended into a third day on 9th September, with wrong footing from European equity investors that had begun with a spring in their step that week.
The S&P/ASX 200 index dropped 2.2 per cent, or 133 points, to 5874 on 9 September, trading back at a level last seen at the end of June. Technology stocks were also taking a beating after the Nasdaq fell into a correction – defined as a 10 per cent drop – in just three sessions. The ASX tech sector staged its own correction on 9 September, as Afterpay dropped 4.4 per cent, Megaport slid 6.5 per cent and EML Payments dropped 5.3 per cent the same day.
Big slip up in oil prices added to the negative vibes with the energy sector feeling the pain. Weighing on the sector were Beach Energy, down 6 per cent, Oil Search, down 5.9 per cent, Santos, down 5.4 per cent, Origin, down 4.5 per cent and Woodside, down 4.2 per cent. Brent crude declined another 0.8 per cent, or US33¢, to $US39.45 a barrel after dropping 5.3 per cent overnight to trade under US$40 a barrel for the first time since June on 9 September.
The broad risk off environment supports the USD and bull flattens the UST curve. NOK, the big G10 underperformer, AUD (-0.9%) and NZD (-1.15%) also under pressure.
After President Trump’s hard rhetoric on China (and Biden) late on US Labour Day, US equity futures did not show much of a reaction to the President’s comments during the APAC session. European equities opened the overnight session with a cautious tone while weakness in oil prices also weighed on the energy sector.
US Elections closing up – Impact on the markets
Election years are on average characterised by lower returns and higher volatility, but market dynamics in 2020 will be dominated by the prevailing economic environment
Typically, returns are lower, and volatility is higher in election years than in non-election years (see Exhibit 6), although these averages are significantly skewed by major recessions and market events in recent election years. Returns and volatility in 2020 will almost certainly be attributable to Covid-19, rather than the political campaigns that is quietly existing alongside it.
1. Roadmap for the rebound
Top priority for whoever leads the next US administration will be to manage the economy as it restarts in earnest in 2021. Government finances have been stretched by the vast fiscal packages approved so far and tough choices will need to be made about whether to push ahead with further stimulus, or to try to tighten the belt as the recovery gets underway. The Federal Reserve (the Fed) may come under increasing pressure to keep yields low, although if this pressure is so strong as to cause investors to question the Fed’s independence, there is a risk that longer-dated yields could be pushed higher.
2. US–China relations
The US-China relationship is now back on a worrying path. The hit to both business confidence and investment intentions across the globe in 2019 highlighted the economic damage that was caused by the trade war. Actions from either country that ratchet up tensions further ahead of the November election are a clear catalyst for market volatility. While so far it has been a Republican administration in charge of the negotiations, further information from the Democrats about how they would propose to manage this relationship may also impact market sentiment.
3. Progressive policy proposals
The most progressive policies moved out of the picture as the most progressive Democratic candidates exited the race. Yet it is still evident that Joe Biden’s vision for corporate America is clearly different to President Trump’s. Democratic proposals for the use of anti-trust legislation to clamp down on “Big Tech”, plans for corporate tax changes and how to shore up the healthcare system are all matters that warrant close attention.