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Cup Day election looming

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by Peter Switzer

With the US election looming, which is on Cup Day — the first Tuesday in November — markets are getting edgy about the fiscal cliff but investors have not been helped by ordinary company earnings reports for the September quarter.

We Aussies are more interested in the Reserve Bank (RBA) decision on interest rates on the same day, but the US poll could have a bigger impact on our net wealth via our share portfolios or super.

Back to the States and it’s not all worrying news with economic readings for the December quarter, which the Yanks are in now, starting to look up. That will help earnings for the quarter.

If this can coincide with an electoral outcome that pleases investors, then a nice end-of-year rally is likely.

Friday data

On Friday, the GDP growth for the USA came in at a higher than expected two per cent compared to a weak 1.3 per cent pace for the June quarter.

Meanwhile consumers are becoming more comfortable with the latest Thomson Reuters/University of Michigan consumer sentiment index coming at a five-year high!

September’s reading was a good 78.3 but in October it rocketed up to 82.6, though it was just under expectations.

These are not signs of a struggling economy, but more of one on the comeback trail.

For scoreboard watchers, the Dow was up 0.03 per cent to 13,107.21 while the S&P 500 gave up a measly 0.07 per cent to finish at 1411.94, which is just above a key resistance level.

US stock markets have retraced a little since their big surge between June and September and the weaker earnings reports, which were expected. The fiscal cliff issue is now putting a lid on stock-buying enthusiasm.

Europe’s effect

However, there’s no big inclination to dump stocks even with bad earnings numbers such as the likes of Amazon, which registered its first net loss in over five years. The company's explanation puts the focus on how globalised these sorts of companies are. The recession in Europe was seen as a key driver of the company’s lower sales and Apple would have experienced the same in Europe as well, even with the fact that many potential customers were holding back for the new product releases that happened outside the quarter.

This shows the importance of Mario Draghi and the European Central Bank’s (ECB) action, and when Europe starts to recover, markets will react positively.

All of this shows the importance of Spain and its need to ask for a bailout, which will in turn lower borrowing costs and which should help a Spanish recovery even with the austerity measures that will come with the rescue funds.

By the way, just over half of the companies in the S&P 500 index have reported. Thomson Reuters says 63 per cent came in with earnings better than expected, but only 37 per cent had revenue numbers better than analysts were tipping.

What to watch

This reflects a slowing US economy but also a troubled Europe and a more sedate growth rate in China. Obviously as these regions grow faster, stocks will start to rise.

In terms of key economic stories for the week, in the USA there will be key housing data, the Chicago PMI, the ISM Manufacturing Index chain store sales, consumer confidence and then the biggie ahead of the election — the latest jobs report.

Tuesday week is the US election and these job numbers might not only affect Wall Street, they could have a bearing on the poll where Barack Obama and Mitt Romney are fighting it out neck and neck.

Despite the fact the Democrats have actually been better for stocks, possibly because they spend more, I suspect a Romney victory would be better-received by US stock markets.

This week in Australia

In Australia this week, we get a run of data ahead of the Cup and RBA board meeting next Tuesday, which could affect the key interest rate decision.

Tuesday brings new home sales, Wednesday, building approvals and Thursday, the latest read on home prices as well as what’s been happening to import as well as export prices.

A rate cut was an 85 per cent chance last Monday. Then the inflation data came in at 1.4 per cent thanks to the carbon tax and that lowered the money market’s odds of a cut to 60 per cent by mid-week. However, by the weekend it was down to under 50 per cent!

The RBA is supposed to ignore the carbon tax effect on inflation but the September inflation number was probably 0.4 per cent higher than was expected.

If there’s no cut, the carbon tax and its architects will get the blame.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Monday, October 29, 2012

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