What’s impacting Aussie stocks this week, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.

There was a disconnection between the Australian and US equity markets last week as the S&P/ASX 300 gained 1.6% while the S&P500 lost 0.6%.

This partly reflects a divergence in near-term trends.

Covid case numbers continue to rise in the US and in Europe, the fiscal package impasse remains and the Fed has delivered less monetary policy support than many hoped for.

In contrast, case numbers continue to improve in Australia, leading to a relaxation of restrictions and optimism about re-opening of borders. The federal government has also talked up budget stimulus.

We believe the market remains in a consolidation phase following its strong run.

Risks remain, but economic recovery, abundant liquidity and the scale of policy support (with the prospect of more if needed) provide powerful counters to the threat of a prolonged correction.

Covid trends

Australia continues to do better than many expected. New daily cases continue to trend down in Victoria and unidentified community transmission in NSW has been brought under control.

Various real-time statistics demonstrate that activity continues to improve. Dining-out data continues to trend upwards in NSW and Queensland, while regional Victoria is starting to see a resumption.

This bodes well for continuing confidence in an improving economy along with the approach of summer and talk of further budgetary measures.

Case numbers continue to trend upwards in the US, though there is some distortion for the accounting of lagged results from Texas.

Overall the positivity rate continues to decline, though there has been a small pick-up in hospitalisations which bears careful watching.

The bigger issue is a rise of cases in Europe, which has now overtaken the US. This needs careful monitoring for signs of any return to lockdown.

For now mortality rates and hospitalisations have stayed low.

US election outlook

Most pollsters and analysts continue to assign a 70-80% probability of a Biden win ahead of this week’s first debate. The bookies, burned by 2016, are more circumspect with a 50-60% probability in Biden’s favour.

Polling suggests only 20% of people expect a result on election night, with 45% predicting a result within a week.

Debate over the market implications of a Biden victory is convoluted, but we suspect the view that Trump is good for markets and Biden is bad is too simplistic.

Taxes may go up under Biden — any additional capital gains tax may prompt a bout of selling.

But we may see greater fiscal expansion and a more accommodative Fed under a Democrat administration. This would be pro-growth.

A lot depends on the margin of any victory and the Senate results. While there may be nuances, large-scale fiscal stimulus and monetary expansion is likely to remain in place regardless of the outcome.

Market outlook

Correlations remain high across markets, with a stronger USD dragging on returns for US equities, commodities and gold last week. Brent oil fell 2.9%, iron ore was down 2.6%, copper dropped 4.5% and gold was off 4.8%.

While case numbers and concerns over growth prompted a 1.8% gain in the US Dollar index, this did not translate to stress in credit markets or liquidity.

Concerns over the possible economic impact of rising case numbers prompted outperformance of US growth names as investors sought certainty on earnings.

Australian equity gains were led by large caps — particularly the banks (+4.4%) and health care (+4.0%).

The banks benefited from news that the government was planning to relax some rules around responsible lending.

The effect on credit flow is likely to be marginal. But it may help ease pressure on some borrowers as mortgage deferral periods roll off.

The bigger issue for banks remains the margin squeeze from lower interest rates and a limited ability to reduce costs.

Talk of further rate cuts only exacerbates this headwind. However on the positive side it may also signal an end to the extended period of tighter and tighter regulations which the banks have faced over the last few years.

Gold miners and resource stocks underperformed last week as commodity prices came off. Northern Star (NST, -8.4%), Evolution (EVN, -8.3%) and Saracen (SAR, -6.6%) were the worst performers in the ASX 100.

Expectation of an October rate cut drove bond yields lower, generally helping utilities and infrastructure names.

Conglomerate Soul Pattinson (SOL, +14.4%) was the strongest performer on the ASX 100, followed by Transurban (TCL, +8.4%) and TPG Telecom (TPG, +7.2%).

Atlas Arteria (ALX, -3.7%) bucked the broader trend of infrastructure outperformance as French case numbers grew. Though at this point there has been no traffic impact on its toll roads.

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds. He manages a number of our flagship funds along with one of the largest equities teams in Australia.

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