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Australian Elections Preview – How Will Markets React?

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Talking Points

  • Labor ahead in the polls, Senate composition will be key
  • Climate change will be a big driver of votes as weather conditions in Australia become more extreme
  • A Labor victory could unsettle markets if their pre-election promises are implemented

Q2 Australian Dollar Trading Forecast

As the Australian Federal Elections are approaching and with pre-polling already underway, party leaders have not had much time to campaign for votes since the elections were announced on April 4. While it is not uncommon for Australian election campaigns to be short, some believe short campaigns provide some relief for the economy, as political uncertainty running up to elections tends to put business and household consumption on hold, so a shorter campaign poses less risk to the economy.

Most predictions point to a Labor victory, driven mainly by public dissatisfaction with the current Liberal/National Coalition, which has had three leaders in the last 4 years.

Despite the future of the economy being a main concern to most citizens, the Australian Election Study, which offers a glimpse at the underlying trends around federal elections, is showing that voters are losing confidence in governments being able to influence the economy.

Voter Sentiment

Traditionally, voters that think about the economy and its outlook will prefer the Liberal Party, whilst voters who are concerned about health, education and inequality will prefer the Labor Party.

But climate change is going to be a key driver of votes in this election, as 2018 saw a series of fires, floods and the country’s worst drought devastating hundreds of acres of wildlife. Natural disasters are becoming an increasingly worrying concern for Australians which will pay special attention to each party’s policies on how to tackle climate change.

And Labor leader Bill Shorten has promised that if they win the elections they will reduce carbon emissions by 45% on the levels of 2005, a big difference on the 26% promised by the current Liberal-National led government.

But with polls showing only a narrow victory for Labor, the composition of the Senate will be key to whether the governing party will be able to pass their policies, and a major focus for investors. And for the first time since the voting system was reformed there will be a half-Senate election. This means that whilst it is unlikely that either of the two major parties will gain a majority in the upper house, the composition of the Senate is not expected to be as fragmented as before because successful candidates will need a larger quota of votes to be elected.

Poll results as of May 15

Australian Elections Preview - How Will Markets React?

Source: The Australian

Market Reaction to Previous Elections

Evidence shows that stock markets tend to trend sideways during election periods as investors do not like the uncertainty surrounding a possible change in politics, providing no solid direction for stocks. Specifically, for Australian stock markets, previous elections that have resulted in a change of government have been mixed.

Australian Stock Market Before and After Elections

Australian Elections Preview - How Will Markets React?

Source: Bloomberg, AMP Capital

Leaving 2007 out due to the financial crisis which it preceded, on average Australian shares have performed better in the 3 months post-election following a Labor victory. The average gain for the stock market after a Coalition victory is 4.65% and 7.75% for the Labor Party.

A clear election result is expected to boost the Australian stock market as the clearing of uncertainty is what makes markets move higher, but uneasiness about Labor policies if there is a change in government could see the post-election rally halted.

Economic Landscape

The AUD jumped on May 7 after the Royal Bank of Australia (RBA) announced it would leave its key Official Cash Rate unchanged at a record low of 1.5%, after a strong jobs market pushed back the need to cut rates further.

But mixed jobs data released on May 16, two days before the final election day, pushed the Aussie dollar lower as it was revealed that unemployment had risen to 5.2% in the month of April, up from 5% the month before, despite jobs growth of 28.4k beating expectations of just 15k. The RBA is known to place special focus on jobs data, especially after it hinted that the previous rate decision had been mostly influenced by a strong jobs market. At the time of this reading, markets are pricing in at least one, if not two, quarter point cuts in the next eighteen months.

Despite inflation being weak, the RBA has focused on the jobs market as unemployment continues to fall, but at least one rate cut is expected to take place in 2019. The RBA seems to have finally acknowledged the situation the economy finds itself in, as it slashed its economic expectations for the following months. Actual GDP growth rate in 2018 was 2.3% well below the bank’s last forecasts in February of 2.75%. In response, the bank’s forecast of growth for the first two quarters of 2019 has been downgraded from 2.5% to 1.7%. In November 2018 growth rates for 2019 were forecasted as high as 3.25%.

Global factors remain as the key driver for the Aussie Dollar over the coming days as markets keep an eye out for developments in the China-US trade talks which deteriorated last week as the US imposed higher tariffs on Chinese imports and continued this week with retaliation from China. As China is an important market for Australian exports, a slowing China could have a knock-on effect on the Australian currency and equity markets.

Party Policies’ Effect on Markets

  • Liberal/National Coalition Party

The current governing Coalition party has focused its campaign on showing that the country is performing outstandingly well under their guidance, with 28 years of uninterrupted GDP growth and on track to deliver the first budget surplus in 12 years in 2019-20. The last contraction to take place was in 1991 and despite the 2008 financial crisis Australia still managed to grow above 2% that year.

But given that voters believe the government is not able to have a meaningful impact on the economy, the Liberal Party is going to have to expand its arguments to convince people that they can make a difference

And latest polls show that they have not quite managed to do just that, as Labor seems to be taking the lead with their firm stance on tackling matters that worry citizens, such as inequalities, raising house prices and excessive banking power.

The banking sector is definitely the one that has most to win (or less to lose) if the Coalition Party remains in government, as both the Labor and Green party have pledged to implement sanctions on this industry. We expect to see a recovery in the financial sector, and post-election rally in both equity markets and the Aussie Dollar.

If Labor wins the elections there will be a lot of activity regarding unions and the imbalance of power as its policies are aimed at boosting wages for the lowest paid.

The Labor Party has hinted that they would apply strict regulations and punishments on big banking corporations like National Australia Bank Ltd, Westpac Banking Group and Commonwealth Bank of Australia. It announced plans for a $640 million levy on the nation’s largest banks to support people that have been ripped off by the financial institutions’ “predatory practices”. If they win, and they stick by their campaign promises, these shares could take a hit putting pressure on the ASX 200.

Another key policy for the Australian Labor Part (ALP) is cutting excess franking credits, a measure that refunds investors any additional tax that has been paid by the company on their behalf when receiving dividends.

A key group that will be affected is superannuation funds, which are mostly attracted to Australian companies that pay fully franked shares. If a fund is in pension phase, it has no tax liabilities and therefore is eligible to receive a full refund of the taxes paid at the corporate level on their dividends. If the ALP reform is implemented, they will not be able to claim net (or excess) franking credits, meaning that they will not receive franking credits at all.

In response to this, companies may release credits ahead of the reform being implemented, either via dividends or share buybacks, which may lead to investors favouring these stocks over growth stocks if Labor is elected.

Regarding taxes, they will be matching the Liberal-National coalition’s tax cuts but will direct more money to lower-income citizens. Its plan is to phase out tax breaks for stock market and property investors to help fund its spending plans on health and education, which could be a risky move.

There is a danger that relying on tax hikes for higher incomes will dampen investments. Tax cuts and minimum wages may provide a short-term boost to spending and economic growth, but higher minimum wages could lead to a less flexible labour market and a negative impact for services, retail and construction stocks.

KEY TRADING RESOURCES:

— Written by Daniela Sabin Hathorn, Junior Analyst



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Weekly Trade Levels for US Dollar, Euro, Sterling, Loonie, Gold & Oil

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New to Forex Trading? Get started with this Free Beginners Guide

DXY, Euro, Loonie Monthly Opening-Ranges Intact

The US Dollar Index is trading into the monthly opening-range highs into the start of the week and the focus is a reaction around the 98.05/10 resistance zone- note that the monthly ranges in Euro and Loonie also remain intact. In this webinar we review updated technical setups on DXY, EUR/USD, USD/CAD, GBP/USD, Crude Oil (WTI), Gold, USD/JPY, AUD/USD, EUR/AUD & SPX.

Why does the average trader lose? Avoid these Mistakes in your trading

Key Trade Levels in Focus

DXY – Immediate focus is on topside resistance at 98.05/10. Initial support at 97.87 with near-term bullish invalidation raised to 97.71.

EUR/USD – Euro is coiling into the monthly opening-range just above slope support. Immediate focus is on support at 1.1140. Initial resistance at 1.1187 with near-term bearish invalidation at monthly-open resistance at 1.1215– look for a bigger reaction there IF reached. A break lower would expose 1.1110.

GBP/USD – Sterling broke below multi-month slope support last week with price responding to near-term pitchfork support into the open. Initial resistance at 1.2798 with bearish invalidation at 1.2859. Downside support objectives at the August low-day close at 1.2697 and the 100% extension at 1.2662.

Gold – Risk for near-term recovery while above the yearly / monthly low-day close at 1270. Initial resistance at 1280 with near-term bearish invalidation with the monthly open a 1283.

For a complete breakdown of Michael’s trading strategy, review his Foundations of Technical Analysis series on Building a Trading Strategy

Key Event Risk This Week

Economic Calendar- Key Data Realeses

Economic Calendar – latest economic developments and upcoming event risk

Active Trade Setups:

Learn how to Trade with Confidence in our Free Trading Guide

—Written by Michael Boutros, Currency Strategist with DailyFX

Follow Michael on Twitter @MBForex



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AUDUSD Soars on Shock Election, Apple Shares Slump, Risk of S&P 500 Drop

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MARKET DEVELOPMENT – AUD Soars on Shock Election, Apple Shares Slump, Risk to S&P 500

DailyFX Q2 2019 FX Trading Forecasts

AUD: The Aussie outperforms following a shock election outcome, in which Prime Minister Scott Morrison secured re-election (full story). In reaction, the Aussie gapped higher at the Asia open, reclaiming the 0.69 handle against the greenback. However, as equity markets have headed lower throughout the European morning, risks are for gains to be faded. Alongside this, key headwinds in the form of trade war tensions and a potential RBA June rate cut are likely to limit upside. Reminder, RBA Governor Lowe due to speak tonight after RBA meeting minutes (calendar)

Crude Oil: Oil prices surged at the Asia open as Saudi Arabia signalled that cuts could be extended throughout the remainder of 2019 at the JMMC meeting, while President Trump had also stepped up his critical rhetoric towards Iran. Although, with equity prices beginning to push lower, oil prices have pared the majority of its initial gains.

Equities: US equity futures have headed lower amid the continued crackdown by the US on China’s Huawei, which in turn has chipmakers come under pressure, while Google also stated that they are to restrict the company’s use on android services. Elsewhere, Apple’s price target had been cut by HSBC to $174 (median street price target = $220), citing concerns over China, while tariff led price increases on Apple products could also have dire consequences on demand. Apple shares currently lower by 2.4% in pre-market.

AUDUSD Soars on Shock Election, Apple Shares Slump, Risk of S&P 500 Drop - US Market Open

Source: DailyFX, Thomson Reuters

DailyFX Economic Calendar: – North American Releases

AUDUSD Soars on Shock Election, Apple Shares Slump, Risk of S&P 500 Drop - US Market Open

IG Client Sentiment

AUDUSD Soars on Shock Election, Apple Shares Slump, Risk of S&P 500 Drop - US Market Open

How to use IG Client Sentiment to Improve Your Trading

WHAT’S DRIVING MARKETS TODAY

  1. Gold Price Sell-Off Continues, Silver Price Hits a Six-Month Low” by Nick Cawley, Market Analyst
  2. COT Report: Japanese Yen and Euro Shorts Collapse, USD Longs Reduced” by Justin McQueen, Market Analyst
  3. Crude Oil Price May Be Carving Out a Top” by Paul Robinson, Currency Strategist
  4. Using FX To Effectively Trade Global Market Themes at IG” by Tyler Yell, CMT , Forex Trading Instructor

— Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX



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Gold Price Sell-Off Continues, Silver Price Hits a Six-Month Low

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Gold (XAU) and Silver (XAG) Price Analysis and Charts.

  • Gold (XAU) eyes a cluster of support.
  • Silver (XAG) makes afresh 2019 low as buyers disappear.

DailyFX Q2 Forecasts and Top 2019 Trading Opportunities.

Gold (XAU) Needs to Support to Hold

The sell-off on gold continues with the precious metal down around $30 in less than a week. Gold is under pressure from a resurgent US dollar, buoyed by last Friday’s Uni of Michigan data which smashed expectations and hit a multi-year high. The important 61.8% Fibonacci retracement level at $1,287/oz. failed to provide any support when broken last week, while the $1,287 – $1,281/oz. zone made up of old horizontal support is being tested now. A clear break and close below opens the way to the recent double bottom around $1,266/oz. which is currently being guarded by the 200-day moving average at $1,268.6/oz. Below here the 50% Fibonacci retracement level at $1,262/oz heaves into view.

How to Trade Gold: Top Gold Trading Strategies and Tips

Gold (XAU) Daily Price Chart (August 2018 – May 20, 2019)

Gold Price Sell-Off Continues, Silver Price Hits a Six-Month Low

Silver (XAG) Nears a Fresh Six-Month Low

Another precious metal under heavy selling pressure. Silver is now at levels last seen in early December last year and is over 11% lower since making its recent high of $16.21/oz. in late February. The downtrend since the late-February high continues to be respected and it is possible that silver completely retraces all the way back down to the November 14 low at $13.89/oz. Psychological support at $14.00/oz. may slow the decline, while the CCI indicator shows that the market is extremely oversold.

Silver (XAG) Daily Price Chart (August 2018 – May 20, 2019)

Gold Price Sell-Off Continues, Silver Price Hits a Six-Month Low

Trading the Gold-Silver Ratio: Strategies and Tips.

IG Client Sentiment data show that retail traders are 79.1% net-long gold, a bearish contrarian indicator. Recent daily and weekly sentiment shifts give us a stronger bearish contrarian bias.

— Written by Nick Cawley, Market Analyst

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1



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