Speculation about US politics, as well as negotiations within US Congress regarding a US fiscal stimulus bill, will be the major drivers in the global financial markets. Polling continues to
suggest a Joe Biden victory in the US general election, with the balance of probabilities seemingly indicating a so-called ‘blue wave’, which would see Democrats seize control of both houses of congress, with the markets also positioning for a subsequently bigger spending government after the election. The markets also appears to be less concerned about the possibility of a contested election result. Although it remains inverted, the US VIX Futures curve has flattened considerably in recent weeks.
SPI Futures are suggesting that the ASX200 ought to kick-off the week with a 0.63 per cent
rally, following a neutral lead from Wall Street on Friday. It backs up what was a positive
week for Australian equities, with the ASX200 briefly challenging post-virus-crisis highs
during the week and closing trade 1.22 per cent higher. The highlight for the local trading
week this may prove to be the RBA’s minutes from its last meeting. The minutes will be read for how close the RBA came to cutting rates last month, as market participants price-in a
likely easing of monetary in November, along with the increased likelihood of a more
conventional quantitative easing program from the central bank in the near future.
Virus and lockdowns
Second and third waves of the coronavirus in several major economies is weighing on
market sentiment. A spike in infections in the UK and parts of Europe cast doubt over the
global economies recovery last week, the UK and France two notable countries to reimpose
fresh lockdown measures. The need for a vaccine has become more pronounced for the
markets, as it becomes clearer that the global economy faces a slow journey to normalcy
without one. Hopes were bolstered at the end of last week that a vaccine may come sooner
than expected, after US pharmaceutical company Pfizer flagged it could release its vaccine
by as soon as November.
US earnings season
The reporting period for US corporates has so far been a positive one. According to financial
data company FactSet, of the 49 companies that have reported profits, 83 per cent have
exceeded expectations, with the market now tipping a contraction in earnings this quarter
of -18.5 per cent. Better than expected results from financial sector firms were largely
responsible for the outperformance, with some of America’s biggest banks surprising
investors by reporting lower provisions, and continued strong revenues in trading divisions.
Attention will turn to US tech in the week ahead, with Netflix and Tesla reporting
their Q3 results.
A raft of economic data will deliver a health check on the global economy’s recovery this
week. China will publish its GDP data for the quarter, with economists tipping the figure will
reaffirm the view that the Chinese economic rebound is on strong footing. GDP is projected
to have expanded by 5.5 per cent on a quarter-over-year basis, up from 3.2 per cent last
quarter. Global PMI surveys will also be closely watched to get a live pulse on global
business activity. Estimates are suggesting a plateauing of both manufacturing and services
activity across the world economy, with special concern directed to the services surveys this
week, as fresh lockdowns roll-out across several major economies.
Listen to the Short Squeeze, our weekly markets podcast produced in conjunction with IG here. Episodes last for about 10 minutes and are also available through Spotify and Google Podcasts.
This column was produced in commercial partnership between The Sydney Morning Herald, The Age and IG. Information is of a general nature only.