ASX200 lower on election news

A busy 24 hours for markets which included an ECB meeting, U.S CPI, Federal Reserve minutes and an EU Brexit summit.

The key takeaways were U.S. core CPI came in lower than expected at 0.1% m/m verse expectations of 0.2% m/m. The softer number, the result of the largest fall in apparel prices in 70 years. While leaders at the EU Brexit Summit in Brussels, reached an agreement to delay Brexit until October 31, with a review in June.

Locally, news this morning has been dominated by headlines that Australian Prime Minister, Scott Morrison has called an election for May 18^th. This was the date that most had thought likely, however judging by the sell off in the ASX200 this morning, it’s a timely reminder that markets don’t like political uncertainty.

This is despite the Labor party being strong favourite to win the election. According to betting agency Sportsbet, Labor are paying $1.16 for the win, while the Coalition is paying $4.85. There is a view that Labor’s economic policies are not as “market friendly” as the Coalitions. Two that are cited as problematic for the markets, are proposed changes to franking credits and changes to negative gearing.

On this, I defer to AMP’s Chief Economist, Shane Oliver who highlights that changes to franking credits will “only impact around 8% of taxpayers are potentially a negative for stocks with high-franked dividends”. Changes to capital gains and negative gearing of property has been “estimated to cause a 5 to 12% decline in home prices and a boost to rents of 7 to 12%.” Leading to concerns that the proposed change to negative gearing will exacerbate the current housing market downturn.  

In our last update on the ASX200, https://www.cityindex.com.au/market-analysis/pmi-data-boosts-asx-200/ we were of the view the ASX200 was in the process of completing a five wave advance before commencing a pullback. Based on the uncertainties highlighted above, as well as the divergence viewed on the RSI indicator after the ASX200 traded to a new high, there appears to be good reason to move to a more cautious stance on the ASX200, in anticipation of a pullback, initially to the 6100-support region.

Source Tradingview. The figures stated are as of the 11th of April 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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