A Democrats win will change US policies drastically – with concomitant effects on financial markets
Share markets, exchange rates, commodities, international developments, domestic economic indicators
October struck again! A positive start to the month was derailed by uncertainty and fear – and it showed up in risk assets such as shares.
There is still huge uncertainty about the outcome of the US presidential election – on who the next president will be and whether the results will be contested. The economic, social and political policies of the Republicans and Democrats are worlds apart and a win for the Democratic candidate, Joe Biden, will change some US policies drastically – with concomitant effects on financial markets.
The fear of the second wave of Covid-19 infections that took hold in especially Europe contributed to a sell-off in equity markets. New lockdowns and / or economic restrictions were implemented in a number of countries such as France, Spain, Germany and the UK, while infections in the USA are still spreading at an alarming rate. And new cases were reported in China.
These events dominated positive economic news. Economic growth in the USA rebounded from -9.1% in Q2 2020 to 7.4% in Q3 2020. Eurozone economic growth turned from -11.8% to 12.7%, while China followed its strong Q2 growth of 11.7% with 11% in Q3. But, only China’s gross domestic product has recovered to the extent that its economy is larger than a year ago.
Likewise, the services component of purchasing manager indices for the Eurozone improved.
Nevertheless, the new lockdowns, that will last for at least November, are bound to halt the recoveries and Q4 growth rates are likely to be negative again.
Consequently, financial markets turned to a “risk-off” mode and a flight to safety kicked in, supporting the US$ - which was on a weakening path. Internationally, the prices of shares, as well as of resources such as that of oil, platinum and gold, decreased.
In South Africa, the impact of new lockdowns in the rest of the world will soon lead to some more restrictions on South Africa. However, the economy can’t afford hard lockdowns. Pres. Ramaphosa’s proposed economic reconstruction and recovery plan already showed that it is just not enough. Economic growth of just 3% and this only after a decade is not an acceptable growth plan.
At the same time, the country’s debt burden is soaring. Minister of Finance, mr. Tito Mboweni, announced that the economy is likely to contract by 7.8% in 2020, while the government’s debt to GDP ratio is projected to increase sharply – from 63.3% in 2019/20 to 81.1% in 2020/21 and to stabilize at 95.3% in 2025/26 (it was around 30% a decade ago).
What these numbers show is that whilst South Africa is following the world trend to counter the effects of a deadly virus, we unfortunately don’t possess the same resources to do so! We need a different plan!
Courtesy: Multivest Economic Division