The impact of political sagas on global markets
Between impeachment talks in the US, the ongoing Brexit fiasco in Europe and protesters in Hong Kong rallying in the streets – you could be forgiven for assuming global economic markets are a mess. However, these political dramas don’t necessarily translate into market volatility.
The United States
One of the latest political developments in the US is an impeachment inquiry opening into President Donald Trump, announced by speaker of the house Nancy Pelosi. Ms Pelosi set the scope of the inquiry to focus on the unfolding revelations about President Trump’s dealings with the Ukraine, and the accusation that he withheld aid to leverage for information about his political rival, Joe Biden. This comes in the midst of ongoing trade tension relations between the US and China, which currently show no signs of a resolution. The impeachment inquiry does cause a bit of uncertainty for markets and for business, particularly in the US. However, we ultimately believe that share markets will look through this noise.
The United Kingdom
With a rapidly unfolding – yet somehow stagnant – situation in the UK, it’s a tough ask to cement predictions. However, we do have some observations about what is materially impacting markets to date. Although the happenings and words of UK Prime Minister Boris Johnson often dominate headlines - especially with recent election talk, debates and fallout - it’s the ongoing Brexit saga which is having the most impact on markets.
Brexit is a risk for financial markets because it creates uncertainty for businesses and consumers, especially the longer that the debate on details of the exit agreement between UK Parliament and the EU persists. We note a previous position that the Brexit saga is not disastrous for the global economy. The UK is wearing the brunt of the impact and there has probably also been some negative flow through to the Eurozone economy.
However, the most negative outcome of a ‘no deal’ Brexit looks very unlikely now, which would have created the biggest negative risks for the UK and Eurozone.
The impact of the UK’s moves are not wholly contained, certainly we can expect shockwaves to reverberate around key decision points, but it won’t be as cataclysmic as global headlines suggest from a markets perspective, assuming no entirely unexpected developments unfold.
China: Trade tensions and taking to the streets
Tensions in Hong Kong are ongoing, with protesters making international headlines and continuing to clash with local policy. In terms of market impact, so far, this seems to be contained to Hong Kong, and is not being felt by global markets.
As far as China goes, the trade tensions with the US continue to impact global markets.
Lately, there’s been good news and bad news on the long-standing dispute. The good news is that tensions haven’t gotten any worse, which is an improvement on recent updates. What we don’t want to see is a re-escalation of trade tensions, and more trade tariffs to be imposed on top of what is already in place. That would have a negative impact on share markets.
At the moment, there’s a lot of uncertainty as to how this will end, and how much further the dispute can extend for. We think that ultimately President Trump does want to form some sort of deal with China before the election in 2020, but that may take some months. We don’t expect a quick resolution on this.
More broadly, China’s economic data has been ok recently. There’s been some signs that the manufacturing sector in China is stabilising, albeit at a low level, because of the negatives flow-on effects from the trade war with the US.
Further, Chinese policy makers are putting in place a lot of different forms of stimulus into the economy, and we think that is finally showing up in the data. That should be a positive for Chinese growth in the near term, but any further escalation in trade would de-rail that recovery.
Australia
As is always the case, the housing market continues to dominate the hearts and minds of Australians investors and market watchers. Speculation of boom time conditions returning have started to surface, but the data paints a slightly different picture.
According to figures released towards the end of last quarter from CoreLogic, capital city dwelling prices rose 1.1 per cent in September. Although this seems minor, it is a turnaround compared to a 10.2 per cent decline over a 21-month period, which is worse than what was seen during the Global Financial Crisis of 2007/8. Auction clearance rates also give an indication of what’s to come for the housing market in Australia over the next year.
The rebound in auction clearance rates points to a continuing rebound in home prices in the key markets of Sydney and Melbourne.
Based on past relationships and patterns, the current level of clearances points to annual house price growth rising to around 10 to 15 per cent over the next 9 to 12 months.
Although the bottom of the property cycle is upon us, our base case remains that house price gains will be far more constrained than what Australia has seen in most recent boom time conditions, particularly at its peak in 2016. Key factors to consider here are that household debt to income ratios are much higher, bank lending standards are much tighter than they have been during previous housing recovery cycles.
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Important Notes
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