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Australia heads to the polls

With only four days to the federal election it is a good time to review what to expect from the market, upcoming economic data and potential reactions post 7 September.

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There have been several pieces released by investment banks about the effect of an election. Goldman Sachs on Friday illustrated that historically there is actually no effect in the week pre and post an election and only mild reaction in the months pre and post, and that different economic data is affected in different ways. There is certainly a myth on the street that an election causes some form of euphoria across the board.

Historic business confidence figures would argue this is the case. Its data tends to fall in the six months leading into an election, and these falls tend to accelerate in the three months leading into the election before sharply rising in the month following, and holding at these levels for three months after the fact before returning to the normal economic cycles.

Business conditions have historically slowed five months prior to an election, before rising sharply one month before the election date, rising further after the election for about three months before also returning to normal cycles.

With every government since 1992, consumer confidence follows a similar trend; seeing a four month rise in consumer confidence post the election – except the 2010 election where it actually fell due to the hung parliament. In 2007 the trend was continuing but was interrupted by the GFC and fell after two months of rises.

Goldman’s piece points to other factors as well which suggests the election is a non-event. Retail sales on average rise modestly the two months prior to the election before drifting in the three months after the fact, lending rates tend to rise as bond yields have historically risen and the ASX and the ASX tend to fall in the months following a federal election.

Considering this election has been running since February, when former Prime Minister Gillard called an election for September 14, the figures above will most likely be distorted this time around. As the electorate has been campaigning for seven months rather than the normal 33 days and most economic data has been at the whim of both sides of politics.

Goldman Sachs also points to the fact that economic data in 2013 is the weakest it’s been for the last seven elections.  The other major difference this election is neither side is promising any major big ticket spending, and are actually promising fiscal tighten as both side look to return the budget to surplus.

This is unlikely to see business conditions recovering on the same historical trajectories as consumer spending will remain constrained. Considering what was released from PEFO at the start of the election, consumer spending will remained constrained as the unemployment rate is expected to rise to 6.25% by mid-2014.

Household income growth remains weak and house of wealth is still inhibited even with a 5% rise in house price in the second quarter of 2013. That would suggest consumer caution is likely to persist after Saturday’s vote and the buzz phrase of FY 13 earnings season will most likely be repeated in FY14 – and that is ‘challenging conditions remain’.

So whatever happens this Saturday it is unlikely that Monday morning will see a scorned earth or grass is greener moment. The markets are more likely to react to the more pressing issue in the Fed meeting on September 17 and 18, the German election on September 22 and the fact that the Syrian conflict is still simmering away under the surface. This election from a market perspective is a non-event.

Ahead of the open, we are calling the ASX 200 up 19 points to 5207, considering the year to date high is 5249; the ASX is in striking distance of this level today. The US markets were shut for Labour Day overnight so today’s leads will come from Europe, which registered strong manufacturing data  and that, coupled with China PMI from Saturday, saw BHP’s and RIO’s London listings adding 2.4% and 4.2% respectively. This should filter through to the Australian listings this morning.

Aussie macro data is on the newswires today with retail sale figures estimated to rise 0.4% from 0.0% last months (which would suggest retail sales figures are following Goldman Sachs’ historical trends) before all attention turns to Martin Place.

The RBA meeting today will be the biggest non-event of the year, with four days to an election Glenn Stevens is not going to shift interest rates and the board is unlikely to suggest anything that could interfere with the election results. Therefore 2:30 pm AEST will come and go very quietly today as the other public servants look to get as much air time as they can before Saturday.

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