ON THE HOME STRETCH
Mark Lister, 5 October 2020
The third quarter of 2020 has wrapped up, and we’re now entering the home stretch. It’s been an exceptionally volatile period so far, but the next three months could well define the year.
Politics will be in focus during the coming weeks, with the New Zealand general election taking place in a fortnight and the US Presidential election just over two weeks beyond that.
Jacinda Ardern is in the box seat to serve another three years as Prime Minister, although that doesn't mean it won't be an exciting election night.
The Greens and NZ First are both on shaky ground, with electorate seats only an outside chance and the five per cent threshold looking challenging based on some polls.
A higher than usual wasted vote and a better election night showing from National and the resurgent Act Party could make for a closer race than some expect.
The US election is shaping up as a more intriguing one, and it will have bigger ramifications for the global economy and financial markets.
In contrast to New Zealand, where there isn't as much difference between the major parties as there used to be, Donald Trump and Joe Biden will bring two very different agendas to the table.
Democratic Nominee Joe Biden is leading the polls, but don’t underestimate Trump's chances. This one could be tight.
Trump is viewed as the market friendly candidate, given his pro-business approach. A Biden win would mean higher taxes, which would likely mean some short-term market weakness as investors digest the impact of any changes.
Relations between the US and China should improve under Biden. While the Democrats still have a bone to pick with China, Biden will take a more considered approach to managing any differences of opinion.
A contested election could add further uncertainty to the equation. If it’s close, Trump will almost certainly challenge the result, which is why he’s so keen to replace Ruth Bader Ginsburg on the US Supreme Court before the election.
After the politics are behind us, New Zealand could edge closer to the unchartered territory of a negative Official Cash Rate (OCR).
A Funding for Lending Programme will be the first step toward a negative OCR, with November a possible window for the RBNZ to formally introduce this.
This would see the central lending money directly to banks at rates very close to the OCR, which would reduce bank funding costs and provide a direct injection of liquidity into the economy.
It would pave the wave for a negative OCR to be introduced in 2021, probably during the second quarter.
It’s important to note that negative interest rates would only occur ‘behind the scenes’ within the banking system. Homeowners wouldn't face negative mortgage rates, nor would depositors be forced to pay banks for holding onto their money.
It would, however, mean that both mortgage and term deposit rates fall even further, while it could put some downward pressure on the NZ dollar.
We will also be watching with interest to see how the economy performs over the balance of the year. In the June quarter, New Zealand posted its worst GDP contraction on record, suffering a harsher decline than that of Australia, Japan, the US and Canada.
Activity has rebounded strongly since then, but with the wage subsidy safety net now behind us this is a crucial period in our path to recovery.
Finally, we are entering a traditionally buoyant time of year for financial markets.
Since 1950, US shares have returned 3.9 per cent during the December quarter, on average. That’s well above 1.6 per cent for the other three quarters. The market has been up 78 per cent of the time, compared with a 62 per cent hit rate for the rest of the year.
Then again, this year has been anything but average.
Buckle up. It’s been an action-packed several months, and 2020 still might have a surprise or two up its sleeve for us.