The Australian sharemarket is set to open stronger on Friday as stocks continued riding Wall Street’s post-election wave overnight, with markets betting on the continuation of several business-friendly Trump policies, and the S&P 500 rallying 2.2 per cent toward its biggest weekly jump since April.
Investors were also waiting for a statement from the latest meeting of the US Federal Reserve Bank, which came out at 6am AEDT staying on the sidelines by keeping interest rates near zero and maintaining its pace of bond buying. The Aussie dollar traded more than 1 per cent higher at 72.75 US cents.
Markets were banking on the US election leading to split control of Congress, which could mean low tax rates, lighter regulation on businesses and other policies that investors like remain the status quo. The tight presidential election still hasn’t made clear who will run the White House, though Joe Biden is pushing closer toward the needed mark.
ASX futures were trading 0.65 per cent higher at 6164 points as of 6:01 AEDT this morning. America’s benchmark index S&P 500 is on pace for its fourth straight gain of more than 1 per cent, and a 7.3 per cent jump for the week. That would be its best week since the market was exploding out of the crater created in February and March by panic about the coronavirus pandemic.
The Dow Jones Industrial Average was up 567 points, or 2 per cent, at 28,415, in early afternoon trading local time, and the Nasdaq composite was 2.6 per cent higher.
Technology stocks were helping to lead the way, as they have through the pandemic and for years before that. Rising expectations that Republicans can hold on to the Senate are easing investors’ worries that a Democratic-controlled Washington would beef up antitrust laws and go after Big Tech more aggressively.
Apple, Microsoft, Amazon, Facebook and Google’s parent company were all up between 0.7 per cent and 2.9 per cent, respectively. They’re also the five biggest stocks in the S&P 500 by market value.
Broadly, markets are seeing split control of Congress as a case of what Mizuho Bank calls “Goldilocks Gridlock.”
Investors see cause for optimism if either Biden or President Donald Trump ultimately wins the presidency, and what they want most of all is just for a clear winner to emerge. “Equities fear uncertainty rather than the actual outcome,” strategists at Barclays wrote in a report.
But the expectation that Biden has a chance of winning has also raised hopes that US foreign policies might be “more clear,” said Jackson Wong, asset management director of Amber Hill Capital. He added, “investors are cheering for that. That’s why the markets are performing well.”
Stocks climbed across European and Asian markets on Thursday.
Wall Street’s rally was widespread, with nearly 90 per cent of stocks in the S&P 500 higher. Qualcomm jumped 13.3 per cent for the biggest gain in the index after it reported stronger revenue and profit for the latest quarter than analysts expected.
That’s been the strongest trend through this earnings season, which is close to wrapping up. S&P 500 companies are on pace to report a drop in profits of roughly 8 per cent from year-ago levels. That’s much milder than the nearly 21 per cent decline Wall Street was forecasting at the start of last month.
Still, many analysts warn volatility may lie ahead. Big swings could return as the threat of a contested, drawn-out election still looms.
Trump’s campaign has filed legal challenges in some key swing states, though it’s unclear whether they can shift the race in his favour. A long court battle without a clear winner of the presidency could raise uncertainty and drag down stocks, analysts say.
But concerns about any big changes in tax policy during the next administration have mostly abated now that control of Congress looks as if it will remain split, said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors.
“History tends to tells us that investors like gridlock because there’s really not a big chance of legislative surprises,” she said
Split control of Washington also carries potential downsides. Gridlock may lessen the chances of the US government coming together on a deal to deliver a big shot of stimulus for the economy, for example.
That’s something investors and economists have been asking for since the last round of benefits for laid-off workers and other benefits expired. A report on Thursday showed that more workers filed for unemployment last week than economists expected, though the number was slightly better than the week before.
Investors are still hoping Washington can agree on more stimulus for the economy, though they say it likely won’t be as big as it could have been following a Democratic sweep.
If Congress and the White House can’t come to a deal, the pressure rises on the Federal Reserve to do more to support the economy, if it can. The central bank has already slashed interest rates to record lows and stepped forcefully into the bond market to prop up prices.
Federal Reserve officials came out from their latest meeting this morning saying they kept monetary policy in a holding pattern, leaving interest rates near zero and making no change to asset purchases, as the final results of US presidential and congressional elections remain uncertain.
“Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year,” the Federal Open Market Committee said in a statement, largely repeating language on the economy it has employed since July. That marked only a slight tweak from the previous statement saying the economy and jobs had “picked up in recent months.”
Investors hadn’t expected it to make any major changes, at least not yet.
The yield on the 10-year Treasury rose to 0.78 per cent from 0.77 per cent late on Wednesday. It had been above 0.90 per cent earlier this week, when markets were still thinking a Democratic sweep was possible that could lead to a big stimulus package for the economy.
The pandemic continues to weigh on economies around the world, with counts rising at troubling rates across much of Europe and the United States. Several European governments have brought back restrictions on businesses in hopes of slowing the spread.
In the US, even if the strictest lockdowns from earlier this year don’t return, the worry is that the worsening pandemic could change consumers’ behaviour enough on its own to undercut companies’ profits. And that’s a potential risk heading into the Christmas shopping season, which many retailers rely on to bulk up sales for the year.
“The underlying economic situation is going to drive whatever happens in the equity markets,” Horneman said.
In London, the FTSE 100 rose 0.4 per cent as England began a four-week lockdown that will keep closed all shops selling items deemed to be non-essential, such as books and clothes. The Bank of England increased its monetary stimulus by more than expected to help the economy weather the new measures.
In Paris, the CAC 40 gained 1.2 per cent, while Germany’s DAX returned 2 per cent.
In Asia, Hong Kong’s Hang Seng gained 3.3 per cent, Tokyo’s Nikkei 225 climbed 1.7 per cent, South Korea’s Kospi rose 2.4 per cent and stocks in Shanghai added 1.3 per cent.
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