Weekly recap
What happened in markets
The Australian sharemarket improved last week, boosted by higher commodity prices and lower bond yields. Interestingly, it looked like the price of iron ore (+1.6%) may have found a temporary floor at around US$92 per tonne, while the gold price (+3.3%) set a fresh record high at US$2,579 per ounce. These developments translated to strength in the Materials (+4.2%) and REITs (+4.1%) sectors. Meanwhile, survey data showed that consumers and businesses were less than optimistic about economic conditions. The Westpac Consumer Confidence Index fell from 85.0 to 84.6 in September, while the NAB Business Confidence Index fell from +1 to -4 points in August.
US sharemarkets staged a remarkable recovery last week, driven by a rally in the Technology (+7.3%) sector. Specifically, it was semiconductor related companies like NVIDIA (+15.8%) and Broadcom (+22.4%), along with Artificial Intelligence (AI) related mega caps like Amazon (+8.8%) and Microsoft (+7.2%) that outperformed. What contributed to these gains were positive company results from companies exposed to AI, like cloud service provider Oracle (+14.2%), along with well received presentations from NVIDIA and Microsoft at the Goldman Sachs Communacopia & Technology Conference. This ultimately led to the general market consensus that tech stocks had perhaps reached oversold territory, given weakness seen over the last few months. Meanwhile, higher commodity prices, lower bond yields and a steady US Dollar buoyed the overall sharemarket.
European sharemarkets also bounced back last week, partly influenced by renewed positivity in the US. The European Central Bank (ECB) delivered a cautious 0.25% interest rate cut, bringing its deposit rate to 3.50%, which contributed to the rally. Unsurprisingly, the Technology (+4.9%) sector was the main standout, pushed higher by key names like ASML (+7.8%) and SAP (+5.2%). On the other hand, automakers (-1.8%) remained weak amid ongoing concerns of weaker Chinese demand, electric vehicle uncertainty and increased competition.
Stock & sector movements
What caught our eye
The US Presential election is heating up and has gained increased investor attention. What’s more, the political landscape has substantially changed since President Joe Biden dropped out of the race. As seen in the chart below, expectations around which party will win have reversed, with the odds now resembling a flip of the coin.
It’s appropriate to consider not only who might win, but also how much power they will really have to pass policy through the US Congress. We can better understand this by looking at the makeup of seats in the Senate and House of Representatives. Based on the chart below, the most likely case is for a divided Democratic party (~34%), closely followed by a Republican sweep (~29%). This suggests that Donald Trump (Republican) would find an easier time to pass policy changes than Kamala Harris (Democrat) if elected. With that being said, it also shows how much uncertainty there really is, given the fairly even split of probabilities now, and how much they have changed since May.
Last week’s presidential debate was the last major political event before the election in November. The contest was fiery, dramatic at some points and lacked policy specifics, quite typical of such events. Though, the debate was particularly important for Harris, given opinion polls showed many voters felt they did not know enough about her. Regardless, there was no new or major development that came from the event. Following the event, Trump’s company Trump Media & Technology Group sharply fell 10.5%. Meanwhile, Harris secured an additional US$47 million in fund raising and garnered the support of celebrity Taylor Swift. This gave us a broad indication of how the public interpreted the debate.
In a prior edition we outlined key economic policy differences between Trump and Harris. In summary, if elected Trump would lower taxes, favour oil/gas production and restrict immigration. Meanwhile, Harris wants to increase taxes, support the green energy transition and promote immigration. Either way, most market participants expect whoever wins will contribute to inflation via expansionary fiscal policy.
From an investment point of view, election years typically involve above average market volatility in the months leading into the election. This then normalises in the months after election day, as greater certainty around who won and their policy agenda becomes known. Overall, investors should find comfort in historical data, which suggests that over the past century election years (+11.0% p.a.) have produced very similar returns to non-election years (+11.6% p.a.).
The Cutcher & Neale Model Portfolios are carefully constructed with a balanced approach and our Investment Committee remains neutral on the US election outcome. This helps ensure our portfolios continue to perform, irrespective of the political landscape.
The week ahead
In Australia, the most notable upcoming economic news will be employment data on Thursday. This will provide us with an updated view on how the labour market is travelling amid higher interest rates. It is expected that the August unemployment rate will inch up 0.1% to 4.3% and that the number of jobs added to the economy will be around 10,000, much lower than the 58,200 added in July.
Internationally, the US Federal Reserve and Bank of England (BoE) will meet and make their September monetary policy decisions. The BoE is expected to keep its cash rate target unchanged at 5.00%, however, important inflation related data will be released in the days prior and could influence the decision. Meanwhile, market participants have priced-in a 50/50 chance of either a 0.25% or 0.50% interest rate cut in the US.
