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Budget update - market impact

After some big moves in recent weeks, markets have lost a bit of momentum in recent days. Traders are waiting to see if the next move is going to be joining the herd for a final year end push higher or responding to nervousness as profit taking begins to escalate

The wait and see mode is typified by two of the leading markets for international sentiment. The US S&P index is still within Wednesday’s trading range while the EURUSD is still inside the range created on Thursday when the Fed announced its rate increase. Animal spirits are unlikely to return to the local market unless the Australia 200 can move beyond last week’s high at 5597.

News that China will return the captured US drone may restore a little confidence this morning. However, the fact remains that this incident is a reminder to markets that geo political tensions may deserve more risk premium under the Trump Administration.

China’s markets will also be a focus this week. Traders are aware that nervousness about China and capital outflows was a key factor behind the international sell-off early this year following the last Fed rate hike. One key difference this time around is that Yuan weakness is so far mainly about $US strength. As the chart above shows, the Yuan has been relatively steady against its trade weighted index over recent weeks unlike earlier in the year when it fell significantly

Markets will also have a watching brief on release of the Australian budget update. It’s possible that a worse than expected deterioration in the budget may create some nerves due to an increased chance of a rating downgrade. On balance however, market reaction is likely to be limited. A worsening of the deficit is already expected. The key variables for the future are commodity prices and wage growth. Today’s statement will probably not reveal anything significant about future government policy. 

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