THE WEEK AHEAD: NEGATIVE OCR ON THE CARDS?
Mark Lister, 9 November 2020
Global markets rallied strongly in the wake of the US election results, rebounding from sharp falls the previous week. The S&P 500 was up 7.3%, with the best week since March taking the index to within 2.0% of its record high from early September. The Nasdaq was stronger still, surging 9.1% on the back of a very buoyant technology sector. Antipodean markets saw more modest gains with the NZX 50 rising 2.1% for the week and the Australian ASX 200 increasing 4.4%. The top performers in the NZX 50 last week were Fletcher Building (+7.8%), Meridian Energy (+6.6%) and Contact Energy (+5.0%), while Sanford (-12.6%), Pushpay (-7.3%) and Fonterra (-4.6%) lagged.
This week is shaping up as a quieter one, which probably isn’t a bad thing given all the action we have experienced in recent days. The dust is starting to settle on the US election, with a Joe Biden Presidency and a gridlocked government the outcome, a scenario which looks to be a net positive for financial markets.
However, there could be more drama to come. Retention of the Senate by the Republicans is key, and it now appears the second Georgia Senate seat will go to a runoff on January 5th, meaning both seats in the state will be in play at that time.
This could provide an outside change for the Democrats to get control of the Senate, as two wins would take both parties to a tie (which means the Vice President, Kamala Harris, would have the casting vote). The Republican candidates are favourites, but only slightly, and any erratic behaviour from President Trump between now and then could have an impact on candidate support.
The slow-moving train wreck that is Brexit will continue this week, for what feels like the tenth year of negotiations. The UK and European Union meet in London to discuss several complicated sticking points that remain. At the same time, Prime Minister Boris Johnson’s controversial Internal Market Bill will continue its difficult passage through the UK Parliament.
Closer to home, we will be watching the RBNZ on Wednesday for developments around a funding for lending programme and any indications of whether a negative OCR is on the cards for 2021. The highlight this week will be Wednesday’s Monetary Policy Statement (MPS) from the Reserve Bank of New Zealand (RBNZ), which is set for release at 2:00pm on Wednesday. This will be followed by a media conference at 3:00pm. Markets will be interested in the latest economic and financial projections, to see whether the RBNZ has become more optimistic since the last MPS in August. A fresh NZ housing market report is out from the Real Estate Institute of New Zealand, while Australasian corporate releases will come from the likes of James Hardie, Commonwealth Bank, Mainfreight and Xero.
The global reporting season also winds down this week. The global corporate reporting season is largely complete now, with 89% of the S&P 500 having now announced results. Of those companies, 74% have beaten revenue forecasts and 83% have exceeded earnings expectations. The aggregate earnings decline for the S&P 500 is currently tracking at -7.5%, a dramatic improvement on the -20.5% fall that was expected before the reporting season began. There are still a few important companies due to report in the coming days, including McDonald's, Adidas, Disney and Tencent. Apple is also holding a product event on Tuesday. The company is expected to unveil the first Mac product powered by an Apple chip, having announced during its Worldwide Developers Conference in June that it would start putting its own chips in Mac computers instead of Intel’s. This will be the third major product event Apple has in the last few months, following an Apple Watch event in September and a new iPhone launch event last month.