Investors to watch outcome of US election closely

This week’s US Presidential election will dominate investor thinking as the RBA is tipped to leave rates unchanged on Melbourne Cup day.

Global sharemarkets, including in Australia, ended last week under pressure as mixed US earnings news and ongoing increases in bond yields ratcheted up investor uncertainty ahead of the US presidential election, and the historic vote this week will continue to dominate the minds of investors around the world.

In Australia last week a mix of economic data which included inflation and retail sales pointed to an economy “continuing to muddle along”, according to AMP chief economist Shane Oliver.

Key local releases this week such as building approvals and international trade in goods will add further clarity to a picture of the true state of the economy.

On Tuesday, Melbourne Cup Day, the Reserve Bank of Australia is expected to announce no change to interest rates.

But, it will be the presidential vote on Tuesday in the US (Wednesday AEDT) which will be front and centre for investors as they think about shares, bonds and other investment opportunities.

Just because the sharemarket remains at record high levels and unemployment is low in the US does not mean this will favour the incumbent Democrats.

“(Donald) Trump is ahead going into the US election, but it’s very close,” Dr Oliver said.

“Historically, a strong sharemarket, low unemployment and falling inflation would point to a win by the incumbent party, but this is not foolproof and the cost-of-living surge and immigration blowout appear to be weighing against (Kamala Harris).”

The RealClearPolitics average of national voting intentions polls has Trump ahead by 0.3 per cent; the RCP poll averages show Trump ahead in five of the seven battleground states; and betting market odds have Trump and the Republicans ahead, although the odds have narrowed to 53 per cent.

“The ‘shy Trump voter’ phenomenon is probably not as much of an issue now and pollsters have reportedly improved their methods, so the election is very close as Trump’s poll leads are within their margin of error.”

On top of the US election, investors will be eyeing the next RBA rates call to be announced on Melbourne Cup Day. Picture: Dan Himbrechts/AAP

Dr Oliver said there was continued good news on Australian inflation, but not good enough for an RBA rate cut in the week ahead. “September quarter CPI inflation fell to 2.8 per cent year on year, down from 3.8 per cent in the June quarter, so it’s back in the target range,” he said.

“However, the plunge was largely driven by electricity rebates and lower petrol prices so it’s best to focus on measures of underlying inflation like the trimmed mean, which fell to 3.5 per cent year on year from 4 per cent, its lowest since the March quarter 2022.

“Headline and underlying inflation are both fractionally below RBA forecasts but are unlikely to be low enough to tip the RBA into a rate cut in the week ahead as it will regard underlying inflation as still too high and services inflation at 4.6 per cent year on year still too sticky, and with the labour market remaining tight we will not see any urgency to cut rates just yet.”

On Tuesday the RBA is expected to hold rates at 4.35 per cent for the 12th month in a row.