BackWhat has changed in the markets after Obama’s re-election?
Keeping asset markets up appears to be an essential element of Bernanke’s approach to revive the economy
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It’s easy to argue that nothing has changed after Obama’s re-election as President of the US and the status quo continues. But, is that really true? While it would be too much to argue that the re-election is a vindication of the policy line taken by Obama so far, it is at least a vote of confidence in his leadership.
The markets are apparently worried about the approaching fiscal cliff in the US—higher taxes and lower government spending—because of partisan posturing resulting from continuing Republican domination of the House of Representatives. But with the election out of the way, would that not increase the chances of a resolution of the fiscal problem? Believing that the US will fall off the cliff is essentially saying that the political leaders there are short-sighted enough to plunge the economy back into recession. While the myopia of politicians when elections are around the corner is an established fact, US politicians will have to reach new heights of truly monumental stupidity if they continue to play dice with the economy after the elections.
On the other side, US Federal Reserve chairman Ben Bernanke and his helicopter will continue what they do best and there will be no shortage of liquidity. The MSCI Asia index, ex-Japan, is up around 9% or so since early September, a gain that can be attributed mainly to Bernanke’s announcement of indefinite and infinite quantitative easing. If the US economy threatens to dip back into a recession, the Fed boss will probably open the monetary spigot even wider, which should again boost risk assets.
Why then did the US market plunge after Obama’s win? It’s likely they were rattled by the prospect of higher capital gains taxes, while there would have been some unwinding by those who had bet on a Romney win.
That said, the road ahead for US fiscal policy will continue to be potholed by uncertainty and it’s likely that decisions will be taken only at the last minute, as happens all the time in Europe. That would, of course, mean choppy markets.
What has changed for the worse, however, is the global economy. JP Morgan and Markit’s Global all-industry output purchasing managers’ index (PMI), which measures both manufacturing and services activity worldwide, is down to 51.3 in October from 52.4 in September. Globally, manufacturing production declined for the fifth consecutive month in October. What’s worse is that the contagion seems to have spread from the European periphery to its core, with Germany’s composite output PMI contracting for the sixth successive month in October, while business activity contracted for the eighth straight month in France.
As for China, the economy seems to have bottomed out, but growth continues to be sluggish. In short, the markets will continue to be torn between riding the wave of liquidity and worrying over the economy.
There is, though, one potent support. Keeping the asset markets up appears to be an essential element of Bernanke’s approach to revive investor and consumer confidence and, ultimately, the economy. Whether it will work or not remains to be seen, but there’s no denying that it has buoyed risk assets.
Back home in India, Chidambaram has been trying out a similar tactic. No wonder he was so piqued at the Reserve Bank of India governor refusing to play ball.
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