There was plenty for markets to work through over the past week including the US midterm elections and central bank meetings, though things turned out mainly as expected and most equity markets were able to extend on the rally from the previous week. Volatility in financial markets remains elevated but is well down from the highs seen during October.
US markets were able to post strong gains again this week, having now recovered approximately half of the heavy declines recorded in October as the detail of the corporate reporting season, in general, remains strong. Meanwhile, European markets have not recovered as quickly, weighed by slowing economic data, Brexit uncertainty and concerns regarding Italy's budget situation. Closer to home, China's major markets gave back the gains achieved last week as concerns over a slowing growth outlook weakened sentiment, which also impacted Hong Kong's Hang Seng index, falling by around 3.3% on the week. In Australia, the benchmark ASX200 index added around 1.2% following last week's 3.3% rally, with the financial, IT and consumer staples sectors all gaining more than 2%.
This week's main risk event was undoubtedly the US midterm elections, which mark the completion of the first 2 years of President Trump's tenure. The result went broadly as the polls and markets had been expecting — the Republicans maintained their control of the Senate, but lost the House of Representatives to the Democrats for the first time since 2010. While the result means a split Congress, this has throughout history been a common situation in the US. In the day following the outcome, global equity markets saw a relief-inspired rally. US markets were able to post strong gains again this week, having now recovered approximately half of the heavy declines recorded in October as the detail of the corporate reporting season, in general, remains strong. Meanwhile, European markets have not recovered as quickly, weighed by slowing economic data, Brexit uncertainty and concerns regarding Italy's budget situation. Closer to home, China's major markets gave back the gains achieved last week as concerns over a slowing growth outlook weakened sentiment, which also impacted Hong Kong's Hang Seng index, falling by around 3.3% on the week. In Australia, the benchmark ASX200 index added around 1.2% following last week's 3.3% rally, with the financial, IT and consumer staples sectors all gaining more than 2%.
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Going forward, the key economic-related issues for markets will centre on a seemingly reduced likelihood for further tax cuts and deregulation within industries as this would require support from both houses, though President Trump will still have the scope to pursue his protectionist agenda on trade policy — the tariffs announced earlier this year on goods imported from China did not require support from the Congress, so ongoing negotiations with China's President Xi likely remain more relevant.
Also in the US, the Federal Reserve held its latest policy meeting where its assessments were little changed; the domestic economy remains strong, though it did note a moderation in business investment, while the labour market continues to tighten. As a result, the Fed continues to see the justification for further gradual increases in interest rates, the next of which is expected in December.
To Australia, and it was the Reserve Bank in focus this week following Tuesday's policy meeting where the Cash Rate was kept unchanged at 1.5% for the 25th consecutive meeting (see here for our note). The Governor's statement that accompanied the decision foretold an upgraded outlook by the Bank for near-term economic growth, a lowered forecast for the unemployment rate and an uplift in inflation over the near-term after it was weakened by once-off impacts in the September quarter ahead of its Statement of Monetary Policy (SoMP).
On Friday, November's SoMP confirmed the RBA had lifted its official forecast for economic growth by the end of 2018 to 3.5% from 3.25%, though this was influenced, in part, by statistical revisions that have boosted growth in previous quarters. Crucially, the RBA expects growth in household consumption to remain around 3% over the forecast period despite acknowledging the uncertainty to that outlook arising from softening property prices and high levels of household debt.
Meanwhile, a stronger growth outlook has seen the Bank lower its unemployment rate forecasts across the board, declining to an average of 4.75% in 2020. Stronger wages growth, though, was still seen as a gradual process. Underlying inflation is now seen returning to within the 2-3% target range by the end of 2019, which is earlier than previously expected.
Also on Friday, Australian housing finance data showed a continued deterioration in September (see our analysis here). As our chart of the week shows, lending to both owner-occupiers and investors is declining sharply, which reflects the impact of tighter lending standards, while softening property prices are also likely to be damping sentiment and demand.
Chart of the week
