Monthly economic update with MLC, October 2020

Funds Management

by Clive Tompkins

MLC Asset Management Senior Economist Bob Cunneen discusses the declines in European and US shares and Australia's 1.9% gain in October, predicting the impact of the US Presidential Election and outlook for the Australian economy. 

Why did American shares fall by 2.7% and European shares by 5% in October?

Global share markets delivered a disappointing return in October with the American share market down more than 2.5% and European share markets down more than 5%. Now, there were a couple of key concerns that dominated markets. In particular, the virus threat has accelerated. There has been a pick up in new infection cases across Europe, as well as the United States. And we've seen announcements in Germany, Spain, France and Britain of lockdowns that will be extended to the end of November. Interestingly, German chancellor Angela Merkel warned of a long, hard winter. The other key concern was the approaching November presidential and congressional elections. And the market was worried about the possibility of a contested election between President Trump and Joe Biden as the challenger.

Is the US election result a major concern for investors?

As it now stands, Joe Biden is leading in the Electoral College, which is the decider for who wins the presidency. But as President Trump has warned, that he's prepared to go to the Supreme Court. There is a risk of legal challenges. This potentially repeats the episode of 20 years ago between George W. Bush and Albert Gore, and in that case, the decision went to the Supreme Court, and it took until December the 12th for that decision to be made. So we have in the next four weeks or so the potential for a major political and legal contest about the outcome of this presidential election.

Why did Australian shares provide a positive surprise with a 1.9% gain in October?

Encouragingly, Australian shares delivered a positive performance in October against the falls in the global share market. Now, this gain of roughly around 1.9% was driven by a very strong rebound in bank shares. Now, bank shares are up close to 7% for the month, and there are a number of positive factors behind the rally in bank shares.

Firstly, we received a very favourable federal budget in terms of income tax cuts and investment allowances. So this was seen as budget stimulus that supports the economic recovery. As well, we had signs from the Reserve Bank that they were prepared to cut interest rates in November, which they subsequently did by cutting interest rates from a quarter percent down to 0.1%, as well as expanding their balance sheet measures, which is buying government bonds, and also providing the banks with supportive liquidity. So this is seen as a positive sign for the Australian economy.

How is the Australian economy travelling and are there some hopeful signs?

We also saw some encouraging economic activity data, and some of the leading indicators in terms of consumer sentiment, car sales, and job ads were particularly positive in October. So they suggest that the worst is behind us in terms of the economic downturn. The other positive news has been the Melbourne virus outbreak, and we're seeing such a reduction in cases that it now looks like the virus is contained, and therefore the Victorian government can relax restrictions on personal movements. Now this is particularly encouraging because it allows economic activity to rebound in Victoria. And with that, the promised economic recovery looks closer on the horizon.


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