US elections and COVID-19 driving markets
26-10-20
George Lucas, Raiz Group CEO
The US is under the investor microscope at the moment, with markets being driven by the ongoing Washington deadlock over a new round of stimulus and the likelihood of a deal being brokered before the November 3 elections. At the same time, focus continues to be on the COVID-19 situation in the US as case numbers rise and some states report that hospitals are under strain.
Looking at the S&P 500, it is now about 5 per cent above its pre-pandemic level, but that may not be due to excessive optimism among investors, considering analysts’ mixed expectations for company earnings as the Q3 earnings season kicks off this week in the US.
On the positive side, earning expectations are upbeat for information technology, communication services and healthcare. These sectors have all fared relatively well during the pandemic and are also overrepresented in the S&P 500 index compared to their representation in the US economy.
In contrast, firms in sectors hit hard by the crisis like energy and financials have a much smaller weight in the index compared to their representation in the US economy. Analysts project that earnings in these sectors will struggle to regain their 2019 levels by the end of 2021.
New coronavirus waves hit US, Europe
The latest uplift in COVID-19 cases in the US is the third major wave to hit the US after the second wave earlier in the summer. That wave didn’t send the economic recovery into reverse and we are not expecting this third wave to either.
Looking ahead, if Democrats win the Senate, we can likely expect more fiscal support to limit the damage from the pandemic. Even if the Republicans win the Senate, US policymakers will do whatever it takes to underpin the markets and economy in the US.
In Europe, where the virus is also resurgent, I do not expect it to dent the economic recovery there either.
RBA hints at quantitative easing
Domestically, a speech by Reserve Bank of Australia (RBA) Governor Philip Lowe was taken as confirming that the central bank was open to additional monetary easing. The RBA has probably overestimated how quickly inflation would recover, which means Australia will have comparatively high real interest rates for an extended period if the RBA doesn’t reduce rates further.
In that speech, Lowe noted that the 10-year yield in Australia has been quite high relative to that in other developed countries. If the Australian yield curve remains relatively steep it will add support to the Australian dollar. So, it’s likely that the RBA will be on a mission to signal to get it lower as at the end of the day the RBA knows that Australian dollar is the most effective tool in monetary policy.
However, in my opinion it’s unlikely that any RBA easing will stop the advance in the local currency due to the ongoing improvement in the global economy, particularly in China, commodity prices and a related increase in risk appetite globally.
Meanwhile, the latest Australian labour force data showed that the jobless rate rose to 6.9 per cent in September, which was largely due to weakness in virus-hit Victoria. As social distancing restrictions ease there, we expect the unemployment rate to fall in the coming months.
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