Fear of Labor Victory at Federal Election May be Pulling ASX Down

Here’s a quote for the day, from Robert Sarnoff, “Finance is the art of passing money from hand to hand until it finally disappears”.

It’s finally disappearing. The lingering and monstrous hangover from America’s credit binge cost the Australian share market yesterday. AU$25 billion in local wealth—which was just standing around minding its own business—was wiped. Banks and financial stocks continue to be the big losers, with Commonwealth Bank (ASX:CBA), National Australia Bank (ASX:NAB), and Westpac (ASX:WBC) all off more than one percent.

We have yet to see any specific evidence that Australian financial institutions face the same kind of writedowns as their American brethren. Ownership of subprime backed bonds is sprinkled through the odd hedge fund and council. But it doesn’t appear concentrated in billion dollar chunks on (or off) the balance sheets of Australia’s major banks.

Not that we’d be a buyer of financials just yet. The bull market in credit is obviously over – globally. What started out as a subprime mess has moved its way up the credit latter to corporate bonds. Investors are beginning to question the quality of all sorts of bonds. And there is a whole universe of credit instruments out there beyond subprime that are collections of things like credit card receivables and auto loans.

The “financialisation” phase of globalisation is obviously having a rough patch. Stocks will bear the brunt of this until there is more transparency about the economy and corporate balance sheets.

If the Aussie share market shouldn’t be affected by subprime (but is anyway) then what’s bringing it down? Several readers wrote in yesterday to ask if the market is telling us that it’s scared to death of a Labor victory at the polls this weekend. Hmmn.

Who knows? What spending priorities would a Labor government have? Would tax policy change? Would it find a way to make housing more affordable? These are all uncertainties.

Whoever runs the next government is going to have a tough time of it. Inflation is gathering momentum all over the planet. Australia faces real capacity constraints (in labour and infrastructure) that are not easily solved with a campaign slogan. And in terms of affordability, we don’t see the housing situation improving any time soon.

In fact, the Australian housing market looks a lot more like the US and UK markets to us the more we examine it. You don’t have the huge growth (yet) in exotic and risky mortgage products. You have a more pedestrian reality: homes are far too expensive as a measure of median income.

Hey explain something to us if you could. Crude oil traded above US$98 in New York today. The Federal Reserve in Washington lowered its growth forecast for the US economy. Home building permits in the US slumped to their lowest level since 1993. And the Dow rallied. Huh?

The big winner in the States was ExxonMobil (NYSE:XOM). It finished 4.4% higher at US$87.82. The entire energy sector may become an institutional refuge as investors bail on the financials. As energy commands a higher weighting in the indexes, the market reflects the importance of energy stocks.

Or, this shows you how absurd it is to use indices as a measure of the health of the economy. High oil prices might be good for Exxon. But what’s good for producers probably isn’t so good for energy consumers – and that includes many businesses all over the world.

What’s this? Somehow we missed the story that the Coalition has promised to bankroll green energy if it wins the election. “The Coalition has pledged US$85 million for clean energy initiatives. Wave, clean coal and gas projects were promised funding from the Coalition if it wins Saturday’s election,” reports Steve Larkin from AAP. Green love. More on geothermal tomorrow.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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3 Comments on "Fear of Labor Victory at Federal Election May be Pulling ASX Down"

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Coffee Addict

On economic issues the difference between Coalition and Labor policies is largely window dressing.

Both parties ignore their own rhetoric and go pork barrelling when they feel they need to.

No Australian government has has ever had anything like the power, impact or influence they claim to have. Its all pork pies.

HAHAHAHA Here’s a secret that only a regular newspaper reader would know: it makes no difference whether Kev or Howie sits in the hot seat for three years… The US Fed may dance to Wall Street’s tune, and the RBA may dance to Pitt Street’s tune – idunno. But these central banks have made it abundantly clear that whoever has their ear, it ain’t the elected talking head du jour. As I’m sure Costello will attest after this comical “rate-rise” campaign. I think the DJIA rallies (every day at about 3:00 pm, until a few days ago, and with volumes… Read more »
Coffee Addict

Subprime is a symptom not a cause. The illness is a very large credit bubble in the guts somewhere.

Maybe subprime will be viewed as the needle that popped the bubble.

I note that the vast majority of Aussie CDO’s are based on credit default swaps. The borrowers are ,in general, very safe bets — though a major meltdown could well increase default rates to a point where many investors are hurt.

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