Crispin Murray: What’s driving the market this week?

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

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THE market has been focused on the sell-off in bonds, which is tied to better US economic data as well as the possibility of a Trump win and a “Red Sweep” of Congress in the US election.

US 10-year Treasury yields rose 16 basis points (bps) and are up 45bps month-to-date.

This flowed through to equities, with the S&P 500 selling off 0.96%. Australia followed its lead, with the S&P/ASX 300 down 0.86%.

China also appears to be “on hold” pending the US election outcome.

The October politburo meeting will be held this week, but the National People’s Congress standing committee’s next meeting, from 4-8 November, is likely to provide the next indication on stimulus plans.

A string of updates from Australian companies noted slowing activity in the US (Brambles, Reece), Europe (Reliance Worldwide) and Australia (Super Retail, Metcash).

Offsetting this, we did see upgrades from Qantas and a good ResMed result.

This reinforces our view that we are at a stage in the cycle where stock-specific factors are more important. 

US economy and policy

There was little to change the prevailing view that economic growth remains solid.

Current anecdotes are distorted by the effect of recent hurricanes. Also, the upcoming election may be prompting some deferral of hiring and investment decisions. 

Weekly jobless claims continue to fall back to their prior levels, with no sign that the recent hurricane-related spike is the start of a sustained deterioration. 

The US Federal Reserve (the Fed) came under some criticism from former member Kevin Warsh, who suggested there was no data which would have justified a 50bp first cut.

Some debate has begun as to whether the Fed will pause and hold rates steady in one of the two meetings before year end.

The market is pricing in a 75% probability of a cumulative 50bp move.

We don’t see a reason for the Fed to pause in November and the market seems to agree – currently pricing only a 5% probability of no rate cut.

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US election

With only nine days to go, Trump remains in better position today based on the polls, though his upward momentum has stalled in the past week.

The RCP Betting Average has him slightly ahead – but well within the margin of error – in the seven key battleground states.

Overall, he is currently a 60% chance of winning, but there is some debate as to whether betting odds can be relied on – noting that in 2016, Trump’s odds of winning were 16% on the day of the election.

Key “Trump trades” – such as a stronger USD, financials and rising bond yields – are outperforming, so the case can be made that a lot of a potential Trump win has been priced in.

Geopolitics

After waiting 25 days, the Israelis retaliated against Iran.

They appear to have targeted military sites, weapons and drone manufacturing facilities, as well as air defence.

The initial interpretation is that this was constrained enough so Iran will not be compelled to respond in an escalating way.

It may be perceived as a sign that tensions will ease for now – and may see oil prices fall.

Markets

Rising bond yields are beginning to hit technical resistance levels, and are likely to pause ahead of Friday’s payroll data and then the US election result.

The negative view on bonds is tied to the fear of inflationary effects from potential Trump policies such as tariffs and lower immigration, which may lead to a tighter labour market.

As mentioned above, much of this concern seems priced in for now.

There weren’t many relevant signals from US quarterly earnings last week. Of the Mag 7, only Tesla reported, with better-than-expected margins driving that stock higher.

Thirty per cent of the S&P 500 has reported to date. The proportion of earnings beats is in line with the historical average of 50%, while 15% have missed expectations.

Another 45% of the market reports this week, including a further five of the Mag 7.

Australia saw a rotation to defensives, such as consumer staples and telecom. Consumer discretionary underperformed on negative stock-specific news, tech was down due to the fall in Wisetech Global, and higher bond yields weighed on REITs. 

A series of trading updates suggested a slightly softer environment for a number of companies. This was often sector and region-specific, though it is clear that anyone with Europe exposure is seeing more generalised softness.

The Metcash downgrade highlighted the effects of weakening home construction, which goes to the structural challenges for building in Australia.

An upgrade from Qantas and a good result from ResMed did provide some balance.

About Crispin Murray and the Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

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