Equity markets are looking fatigued, lumbering along with little volatility as they wait for the US election result says boutique investment manager Instreet.
This of course, is completely contrary to what we had expected for 2016, especially how the markets opened the year, adds George Lucas, managing director Instreet.
“The ASX200 closed at 5430 on Friday, which is pretty much the same level it was three years ago. Whilst we haven’t been rewarded through capital appreciation, we have at least had dividends that are generally higher than the rest of the world.
“Now all eyes are currently on the US Presidential election. Markets are anticipating a Clinton win, with the expectation the Democrats will win the Senate whilst the Republicans will win the House.
“If Trump fails to get 40% of the popular votes, and let’s face it – he’s not doing his party any favours, the House may also go the Democrats. Currently the polls show Trump with 45% of the popular vote.
“Whilst this would make it easier for Clinton to get policy approved, the market won’t necessarily be happy with the outcome given the Democrats’ recent shift to a more protectionist stance (led by Bernie Sanders). Healthcare stocks will also take a hit as the Democratic party plans to mend Obamacare.
Looking closer at US and EU economies, Lucas says that diverging economic outlooks and policies between the US and Europe have helped push the US Dollar (USD) higher whilst the Euro has hit a seven-month low.
“This came as the European Central Bank (ECB) decided to leave policy on hold at its Thursday meeting. Initially the Euro rallied on the back of the decision because there was no direct discussion about whether the Asset Purchase Program would be extended beyond March 2017.
“Later, however, ECB President Draghi signalled that asset purchases would not end abruptly. The market took this as a sign that the quantitative easing program will be extended past the March 2017 date.
“There is also divergence in inflation expectations between the EU and US. Expectations are growing that inflation in the US will rise and, in response, we are beginning to see traders increase their exposure to rising inflation – especially as the price of gasoline and oil continue to rally.
The US Federal Reserve is meeting in the first week of November and rates will likely stay put. The market is, however, expecting an increase in December. This is in stark contrast to the EU and Japan where inflation expectations remain subdued and monetary policy may be loosened further.
He adds “Positive commentary has been circling emerging markets recently as issues in Brazil seem to be coming under control – they even cut interest rates last week.
Emerging markets are now better placed to withstand potential shocks from an increase in US rates. External vulnerabilities have been reduced, equity valuations are generally not high and many markets should receive support from rising commodity prices and improving outlooks for economic growth.
“In Australia, CPI inflation data for the third quarter is due out on Wednesday and it will likely show a rise in inflation. If it is up, the RBA is unlikely to cut rates in November.
“We also received employment data for September which showed a further decline of 9,800. I don’t think it will bother many people though given the monthly data is often volatile and unemployment has fallen from 5.7% to 5.6%,” said Lucas.
