Investors focused on US markets have a busy week ahead: the presidential election on Tuesday will be followed by a two-day policy meeting of the Federal Reserve starting on Wednesday and the release of the latest monthly jobs report on Friday.
The election is expected to have significant implications for the nascent economic recovery, which has already shown early signs of stalling as the pace of jobs growth slowed in September.
Many fear it could be days or weeks until the final vote tally is revealed, given the unprecedented number of mail-in ballots being used because of the pandemic. Some investors are even bracing for market volatility in the event that the results are disputed.
In light of this, analysts expect the Fed to hold off from making any big policy adjustments. Instead, investors will be watching the political developments for signs of policies that could return confidence back to the stock market. Global equities had their worst sell-off since March last week as fears rose over the economic impact of coronavirus.
Some strategists have predicted that a Biden presidency, especially if accompanied by a Democratic sweep of both chambers of Congress, would pave the way for a more generous fiscal stimulus package. The Fed has repeatedly called for additional aid from legislators, with its chairman Jay Powell himself applying considerable pressure.
But four years on from Mr Trump’s shock win, investors are not taking anything for granted. Colby Smith
How much extra bond-buying will the Bank of England announce?
As a second wave of coronavirus prompts a flurry of containment restrictions across the UK, investors are betting that the Bank of England will announce further measures to prop up a flagging economic recovery at its policy meeting on Thursday.
Most analysts expect a further round of bond purchases this week on top of the £300bn already announced since late March. The only questions that remain are how much the central bank will buy and how united the members of its monetary policy committee will be.
According to Elizabeth Martins of HSBC, the threat to the economy is severe enough to force a unanimous vote for an additional £100bn of purchases.
“For a while in the summer, it did look as though the UK might be doing better than expected, and certainly that the BoE viewed it that way,” Ms Martins said. “Unfortunately, though, three months is a long time in a global pandemic, and the economic picture has deteriorated.”
Andy Haldane, the BoE’s chief economist, is likely to be the only member of the nine-strong monetary policy committee to oppose more quantitative easing, said Ruth Gregory of Capital Economics.
Ms Gregory also expects £100bn of bond purchases, paving the way for even more next year. While that will do little to prevent another recession if Covid cases continue to rise and the government brings in more restrictions, it should pin UK borrowing costs at a very low level for “the next few years”, she said.
The 10-year gilt yield trades at about 0.26 per cent, not far above its all-time low. Tommy Stubbington
Will Australia’s central bank loosen monetary policy further?
Guy Debelle, deputy governor of the Reserve Bank of Australia, told parliament last week that the country’s first recession in almost 30 years was probably over. Nevertheless, investors expect the central bank to proceed with plans to cut interest rates and launch another round of quantitative easing at Tuesday’s policy meeting.
In recent speeches, RBA leaders have signalled they intend to focus on inflation rather than longer-term projections — an acknowledgment that inflation had remained below the bottom end of the bank’s 2-3 per cent target range for more than four years. Tackling rising unemployment, which economists predict will climb from 6.9 per cent to 8 per cent by year’s end, is another priority.
The RBA is also concerned that large monetary stimulus measures undertaken by rival central banks has led to a strengthening of the Australian dollar, which is acting as a drag on growth and forcing it to further ease monetary policy.
“There is more that the RBA can do, and they should do it, and they will,” said Saul Eslake, economist and fellow at Tasmania University.
He predicted that the RBA would on Tuesday cut the cash rate from 0.25 per cent to another record low of 0.10 per cent. An expansion of the RBA’s bond-buying programme to target the longer part of the yield curve was also likely, Mr Eslake added. Jamie Smyth