Market Update: October 2020

Australian stocks rose 1.9% in October, driven by a 7.5% rise in banks which stand to benefit from the prospect of loosening responsible lending laws. We summarise the main indices below:

Rising Covid-19 cases in Europe and the US were a drag on international equities, but news this morning of a potential vaccine has had an enormous impact on financial markets. Pfizer announced that human trials of their vaccine were over 90% effective, and that it would have enough doses to immunize 15-20 million people by the end of the calendar year (and over 1bn people in 2021). In reaction to the news, the “re-opening trade” was a major theme and oil prices shot up over 7%.

The reports are, obviously, an important step in the right direction. It is important to stress that there is a long road ahead still and markets are perhaps being premature in their buoyancy. We will have to wait a couple more weeks before finding out whether the vaccine is even approved, and then there is the logistical challenge of actually rolling out the vaccine, however whilst the approval process is in place, production will occur. We are optimistic, and the timing of this news is critical as we are in the midst of a potent second wave through Europe:

This isn’t the only big news to arrive early in November. It seems all but certain that Joe Biden has won the US Election and will become the next President of the United States. Assuming that legal challenges don’t upset this result, what does a Biden presidency mean for markets? UBS research put together the following as part of three potential scenarios which provides some useful guidance across key areas.

Share markets have so far responded favourably, which probably has a lot to do with ‘the best of both worlds’ scenario whereby the potentially reduced stimulus proposal is offset by not being able to get through the proposed tax increases to US corporations, which would have negatively impacted the tech sector in particular.

Beyond the initial reaction, more US stimulus, a more predictable president and a toning down of the trade war should be positive for non-US shares. The move towards a more diplomatic approach to resolving issues with China could be particularly positive for Australia to the extent that it would also help encourage Australia and China to resolve tensions that have been ramping up recently. This in turn would help avert a further threat to our exports to China and support Australian exporters and the Australian dollar.

With all the above going on you probably didn’t notice that the RBA cut interest rates to another record low and now stands at just 0.10%! They also indicated that they would rise within the next two years and backed this up with an announcement of an additional $100bn bond-buying program. The latest round of easing should help the recovery by further lowering borrowing costs, encouraging investors to take on more risk and keeping the $AUD lower than it otherwise would be. While the major banks left their standard variable rates on hold at around 4.5%, they cut their fixed rates (in some cases to below 2%) and will continue to be under pressure from consumer threats to leave without adjustments to rates. A big risk of course is that it all contributes to a renewed surge in house prices and debt, leading to financial instability problems down the track. This is likely to bubble away in the background for new year or two, and is something we will be tracking. The potential uptick in inflation and long term interest rate expectations may have large ramifications.

In the meantime, it is very pleasing to see such promising vaccine results and hopefully we can see quick progress on this front.