3 November 2020

Insights

There will be no white flag above their door.

A week to live in one’s memory.

The RBA should today confirm what the market is expecting, yet another rate cut to a new record low in rates, this time a cut to 10 bps is expected in the cash rate amongst other changes and a move to “full” QE by buying bonds further out the curve. There will be no white flag above their door as they are going (almost) all in with really only a move to negative rates left in their armoury. The commitment to keep rates at record lows will be emphasised and will eventually give clarity to borrowers outside the housing market. The housing market meanwhile is showing the impact of lower rates as housing finance surges with dwelling approvals amidst a stabilisation of housing prices.

US election day is upon us and the models suggest a clear Biden victory, to quote Nate Silvers 538 “Biden’s chances of winning hover between the high 80s and low 90s in our forecast. Don’t get too obsessed with the exact number. What’s important to remember is that Biden is favoured, but there is still a path for Trump” Pennsylvania has become the most likely tipping point state but it is also unlikely either side will throw in their white flag on the election night, just how messy this gets will determine the initial financial market reaction but we have been here before (Bush v Gore) although the reaction is likely to be more divisive this time around. 2016 lives in peoples memories but the data suggests a clear Biden win.

One of the concerns as expressed by the RBA is that Australian longer end yields were too high relative to other developed nations implying this would attract capital and drive the exchange rate higher. Their recent comments have helped push Australian 10 year rates lower and the prospect of post-election fiscal stimulus in the US has seen their rates rise ensuring the RBA has already achieved its aim in the short term. The Australian Dollar is “supposed” to fall 3-5% under QE although I think other factors are going to swamp that effect, notably the (almost) total eradication of Covid 19 in Australia.

Australian and US 10 year yields.

Source: Refinitiv

Financial markets live for weeks like this, trading desks work around the clock on a known event like the US election and (over?) analysis abounds. Blue sweeps, the margins of victory, court challenges all feed into market analysis but to a degree these are all based on assumptions on what policies people believe the incoming administration will enact. Reform though is usually not spelled out at this stage so the markets go with the most likely outcomes. Reform in whatever form it takes will drive longer term returns, positive or negative.

All of this as the second wave of lockdowns takes hold in Europe which comes with an economic cost. Using Asia and in particular Australia and NZ as examples of what lies ahead suggests these lockdowns or adjusted versions of them will remain in place for some time. Mobility comes at a cost, a cost politicians now see as too high, summer playtime is over in Europe. Recent Australia and NZ election results also point to the political benefits of “beating” Coronavirus. That theories biggest test comes with the US election but I doubt that will alter the European countries reactions.

Makes for the most interesting of times.

And amongst this we have launched Beckon Capital. There will be no white flag above our door.

Meanwhile we have the distraction of the Melbourne Cup today, I don’t believe in omen bets but if you do I would suggest going with either Russian Camelot or Surprise Baby.

"White Flag" is a song by English singer-songwriter Dido, released on her second studio album Life for Rent on 1 September 2003.

David “Bushy” Nolan

*Beckon Capital Pty Limited (ABN 49 628 013 678), authorised representative No. 001280538 of Fundhost Limited (ABN 69 092 517 087, AFSL No. 233045) (“Beckon”)