Daily Market Reports | Aug 23 2010
By Greg Peel
After a tumultuous weekend, let's get Wall Street out of the way first.
There were no economic data releases or earnings reports of major import on Friday night in the US. It's summer, it was Friday, and there was never likely to be much volume. Wall Street opened weaker, continuing a dour mood after Thursday night's poor weekly jobs result. The Dow fell as low as 127 points down before some buying appeared last in the session to provide a close of down 57, or 0.6%. The S&P lost 0.4% to 1071.
Strength in the US dollar (up 0.7% to 83.04 on the index) saw gold fall US$4.40 to US$1228.00/oz and commodity prices slip by 1-2%. The Aussie was steady ahead of the election. The SPI Overnight lost 9 points or 0.2%.
The Aussie has since slipped around half a cent, which one might consider the opening trade on the uncertainty created by Saturday's lack of election result. We've all been swamped by election news since, so here is my quick summary, and take on the matter.
We went into the weekend knowing that from a coldly objective share price point of view, a Coalition victory would be positive and a Labor victory more a status quo. A positive response to a Coalition victory would be most felt in the resources sector given the removal of the MRRT and no chance of any form of carbon tax – outcomes that would have been well received by offshore investors.
We've come out of the weekend knowing that no party has a majority, and as such a minority government is the only possible outcome. At this stage the most likely result is 73-72 between the majors, but at this stage that result could go either way. The Coalition is slightly ahead on votes, and if they achieve 73 seats they are in with a chance of forming a government. If Labor wins 73, the Coalition looks unlikely to be able to reach 76 seats in a minority government, given the Green seat is pledged to go with Labor and the Tasmanian independent Andrew Wilkie was previously a Green.
(Wilkie may yet lose, but then Labor would take the seat anyway.)
So if we assume 73-72 to the coalition, we can add back two cross-bench seats to Labor to provide 74-73 to Labor. It then comes down to the three incumbent rural independents. If they all go to the coalition, that's 76 and a government can be formed. And the members are all ex-National, so one might presume they would.
My opinion is that a Labor minority government will be formed. The reason could be largely summed up by the fact those ex-Nationals are ex-Nationals for a reason. But first we must also appreciate that there is no constitutional right of preference bestowed upon the party which wins the most seats, or the highest primary vote, or the highest two-party preferred vote. It is simply a matter of co-allaying 76 seats, and it appears Labor has a better chance.
Listening to the ABC radio on Saturday morning, I noted Independent Tony Windsor calling Coalition senator Barnaby Joyce a fool, Independent Bob Katter effectively calling deputy Coalition leader Warren Truss a traitor, and all three independent members stressing the importance of an NBN for rural Australia.
I also draw upon the remarks made by Greens leader Bob Brown on Saturday night that his party has been given a responsibility to be the voice of rural Australia, given the Greens achieved a greater primary vote than the Nationals. Having secured the balance of power in the Senate, whichever party forms government they will have to be able to appease the Greens. I therefore see the most likely result being a Labor government. Irrespective of which result the stock market might prefer, a Labor government would be more stable. A Coalition government including dissatisfied ex-Nationals and facing a hostile senate does not bode well for policy stability.
Uncertainty has a greater negative impact on stock markets than unfavourable, but known, policy.
There will nevertheless now be a period of uncertainty over the result itself, and the local market is not likely to shift dramatically either way until an outcome is reached, notwithstanding global influences.
Of course, my objective opinion on a winner could all mean nothing if suddenly those three independent members were promised the world by either party, perhaps including a complete NBN policy back-flip from the Coalition. Whichever way you look at it, rural Australia is in for a spending spree.
While the local market may well be in a form of limbo this week, the fact remains this week is the busiest week of the reporting season, with the greatest number of companies reporting. There will be further reports the following Monday and Tuesday, and then the season will be abruptly over as August ticks into September. Thus from an individual stock point of view, and a general earnings win/miss ratio point of view, the local stock market still has much to drive sentiment this week.
Australian economic data are kept to a minimum in reporting season, with this week seeing only second quarter construction work done on Wednesday and the Conference Board index of leading economic indicators from June on Thursday.
It's a lot busier in a sullen US, however. Tonight sees the Chicago Fed national activity index, Tuesday the Richmond Fed manufacturing index and existing home sales, and Wednesday new home sales, the FHFA house price index and durable goods orders. On Friday the first revision of US second quarter GDP is provided, along with the first Michigan Uni consumer confidence survey for August.
Over the week the US Treasury will auction US$102bn of two-, five- and seven-year notes and thirty-year inflation adjusted bonds.
The UK will provide its first estimate of second quarter GDP on Friday.
For further global economic release dates and local company events please refer to the FNArena Calendar.
