With the US Presidential Election just a couple of months away, what kind of policies could impact global markets, including here in New Zealand? This week Ryan Bridge breaks down the race for Presidency with Milford Senior Analyst Andrew Curtayne. Andrew provides insight into possible market reactions and volatility, touches on global political instability, and also discusses US Federal Reserve Bank Chair Jerome Powell’s speech at Jackson Hole.

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Bridge talks Business: 27 August 2024
Episode Transcript

Ryan Bridge
Kia ora, I’m Ryan Bridge and welcome to episode 3 of Bridge Talks Business with Milford. If you haven’t already, like us, follow us, subscribe us on whatever platform you want, YouTube, iTunes, Spotify, we’re everywhere.

This week, Kamala Harris officially accepted the Democratic nomination to be the next president of the United States. What would a Democratic win mean for stock markets and what if they took out a clean sweep of the White House, the Senate and the Congress? All that and more with Milford Senior Analyst Andrew Curtayne in just a second, but first – Business Bits:

Number 1: You’ve heard of Taylor Swift inflation. Now the Olympics are thought to be partly behind a boost in the latest global services industry data, at least in Europe. US industry remains solid and services still ahead of manufacturing.

Number 2: Back home, more evidence the Reserve Bank made the right call in cutting those interest rates. Q2 retail sales volumes continuing a downward weak trend, down 1.2%. Too early to see any rate cut spending spree that might eventuate in this data.

Number 3: A mixed reporting season here. Sparks not terrible but not great, reflecting the weaker economy. But Fisher and Paykel Healthcare upgrading guidance gets a clap, clap from investors.

Number 4: 818,000 jobs were abducted from the US economy this week. Well, that’s attached dramatic. Statisticians in the US revised down their estimates of jobs growth over the year to March. Not a major, labour market there remains robust. Concerns over that labour market in the US lead us to:

Number 5: Federal Reserve Chair Jerome Powell finally setting sail for a course of rate cuts starting in September.

Which brings us to this week’s interview. 69 days to go until America votes to elect a brand new president. And I hear you, why do I care? They’ll lead the world’s largest economy in uncertain economic times. When they get a cold, we feel the shiver. Some candidates are talking about price controls, others about trade protectionism. We’re a small trading nation down here in New Zealand and this is definitely a variable worth prodding. Milford Senior Analyst Andrew Curtayne is going to do just that. Hey Andrew, welcome to the show.

Andrew Curtayne
Hi Ryan, good to be here.

Ryan Bridge
Good to have you on. Now just a note that this segment is informational only and should not be intended as financial advice. Andrew, let’s start with Jerome Powell over at Jackson Hole. Last week, we’ve all been waiting to hear what he had to say. Finally signaling, not confirming but signaling, we should see some rate cuts come September.

Andrew Curtayne
Yeah, so the key message at Jackson Hole was that he sees inflation heading down firmly on the pathway to where he wants it to be. And so he’s now saying, look, we’re not too worried about inflation, but at the same time, we’re becoming more worried about what’s happening with the employment market. Now as a reminder, the Fed has two goals. One is to make sure that price inflation is at a low and steady level. The second goal they have is to make sure the economy is working at what they term maximum employment, which basically means making sure unemployment is at a fairly low level and most people are able to get jobs. Now those two sort of targets can work a little bit against each other. And what we got at the moment is that inflation coming down means they can cut interest rates, they’re not too worried about restricting the economy and restricting prices. And the other thing that cutting rates does is it generally helps stimulate the economy a little bit more and usually helps the employment market. So, if they’re worried about people losing jobs, then the right thing to do is cut rates. So, the message really is that we’re getting ready to cut rates and we’re probably going to do it in September.

Ryan Bridge
Yeah, so there’s a bit of warning for it. Does this mean that they have successfully avoided a hard landing if they’re talking this way?

Andrew Curtayne
Unfortunately, I don’t think we can quite take a hard landing off the table. The economy and how it develops is very uncertain. So, at the moment, I wouldn’t be saying we’re not going to get the hard landing. But what I think we can say is that the economy is slowing and they’re becoming more worried about it. So, time to ease policy.

Ryan Bridge
All right. And are you a quarter or a half kind of guy?

Andrew Curtayne
Quarter.

Ryan Bridge
Quarter of a cut is your pick. All right, let’s talk elections because I talk to a lot of political pundits about who’s going to win the election. But I’m keen to hear from you because you’re a market analyst. Who’s going to win?

Andrew Curtayne
I don’t know. And I know that’s a little bit of a cop out, but elections are so uncertain. At the moment, you’re looking at the election and the polls are putting Harris at around about a two to three point lead. Now, that sort of reverse from what it was when Biden was the candidate. But a two to three point lead, when we’re still a couple of months away from going to the polls, can move very quickly. I mean, you look, only a few weeks ago, Trump almost got assassinated and things can move so fast. So, yeah, at the moment, we can’t really make a call on who’s going to win. But we can watch things closely and see how it develops. And maybe you get a little bit more of an idea as we get closer to the polls.

Ryan Bridge
Plus polling itself is inherently not dangerous, but it can be a little misleading, right? I mean, looking back to 2016 with Trump, what about what are you seeing in terms of the potential for a president, but also the potential for them to have actual power with the clean sweep, getting the Senate as well as the White House?

Andrew Curtayne
That’s obviously a really important thing from how policy and new legislation gets put into place. So, you know, at the moment, the potential for getting a clean sweep is looking a little bit of an outside chance. Now, the reason is, of course, the Congress in the US is made up of both the House and the Senate. And we’ve got elections going for these at the same time. What the experts are saying at the moment is that it’s looking more likely the Republicans are going to win the Senate and it’s looking more likely the Democrats are going to win the House. Now, of course, if you get that situation, no matter whether you get Trump as the president or Harris as the president, you’re likely then to get a situation where the House and the Senate are by different parties. And so that means that it will be a little bit harder to put through legislation change, will be a little bit harder to make policy changes. And so, the power is a little bit restricted from the president. Now, I don’t want to make it sound like the president won’t have any power. I mean, Trump very, very firmly showed in post 2016 that he could do things like put tariffs on against China. And they can conduct a lot of foreign policy negotiations.

You know, geopolitically, it’s a sensitive time at the moment. So it just means it’s a little bit more difficult to change sort of rules and legislation.

Ryan Bridge
Which in some ways is by design, right? It means that it’s more of a moderate system. You don’t have so many extremes. So, does that help from a market perspective, sort of contain the volatility that an election might endear and cause?

Andrew Curtayne
Yeah, that’s absolutely right. So, from a markets’ perspective, it’s probably more favorable to get a situation where you’ve got to split Senate and House. Markets don’t like uncertainty. They don’t like or don’t tend to like wild policy changes. And so situations where the president’s a little bit more restricted on making sort of big policy changes is probably helpful for the markets.

Ryan Bridge
What policies does the market look at specific policies? And in this election in particular, are they looking at specific policies? Are they worried? Are they anxious about those? Or as you say, is that all kind of nipped in the bud by the potential for no one getting the trifecta?

Andrew Curtayne
No, the market certainly focused on them. It’s getting a lot of attention at the moment. You know probably the two major policies that are getting the most attention, one is under Harris. She’s proposed that she will increase corporate taxes from 21 percent to 28 percent. So, if that goes through, that’s that sort of negative for company earnings. They’ll get a lower level of earnings post-paying these taxes. So, probably puts downward pressure on the stock market. On the flip side, if Trump gets in, he’s talked about doing some pretty wild tariff changes. He’s talking about putting a minimum 10 percent tariff on all imports coming into the United States. He’s also proposing that he’s going to raise the tariffs from Chinese imports to 60 percent and they’re currently around about 20 percent.

Ryan Bridge
So this is this is a blanket one as well, isn’t it? This is every good.

Andrew Curtayne
This is every good. Yeah, there’ll be some subtleties of ones changing, some higher and less, but overall around about 60 percent. Yeah. So this is quite a widespread change. We’ll have impacts on economy, both in the United States, but also globally. So the market is very focused on these. But as you sort of suggested at the start, the view is you need the clean sweep from one party to have the most power to put these through. So, yeah, we’ll see if we end up getting a government where there’s not sort of full control of Congress, maybe they’ll be more limited on the changes or maybe there’ll be a few puts and takes that need to be made to get them across the line.

Ryan Bridge
And as we get closer to polling day to election day in the US and the results potentially become a lot clearer, I suppose these risks, or in some cases what might be seen as upsides, equally become clearer and markets start responding more aggressively.

Andrew Curtayne
That’s exactly right. So as the market gets a little bit more certain of maybe an outcome, we can start to trade maybe on the implications of some of these policies. And if you sit here today and you think there’s only a couple point lead by Harris and we’re uncertain exactly how the Congress is going to fall out, it’s pretty hard to go and make any trades to extreme one direction or the other on these policies. And so what often happens in an election is if you’ve got a tight election, the market tends to be a little bit weak and a little bit more volatile heading into the election, because people don’t know which way things are going to go. They tend to take the cautious approach and maybe take a little bit of risk off. As you get certainty post election, depending on the policies, you may get a reverse of that. But again, still uncertain because depending on who’s in power and what the policies are.

Ryan Bridge
In terms of New Zealand, obviously, we’re a tiny exporting nation, as I said in the intro, free trade is good for us. To have a president talking about protectionism, talking about America first, talking about, you know, minimum 10% tariffs on everybody, 60% on China and stuff. I mean, that’s – not that I want you to give a political opinion – but that type of policy wouldn’t be great for New Zealand firms.

Andrew Curtayne
Yeah, if we export a lot to the US and we do export some to the US, that could be considered negative. But it’s not necessary like the US is our largest trading partners. We trade a lot with Asia. I guess how it develops could be relatively uncertain because if it’s just a US tariff of 10% of goods, that may not have too big an impact on the New Zealand economy. If it sparks a global trade war and it realigns trading partners all around and you get a very, very negative outcome, which is certainly not the base case of a situation where the West and the East basically realign and start trading only with each other, then maybe you get more of a global impact. I did read one estimate if you got that very bearish sort of situation, it could reduce global GDP in the vicinity of 1% or more, which doesn’t sound like a lot, but it would actually be quite material.

Ryan Bridge
And is that a full on, you know, down in the trenches trade war between East and West?

Andrew Curtayne
Yes.

Ryan Bridge
Even then only 1%, I would have thought it’d be more.

Andrew Curtayne
Yeah, the market’s pretty efficient to realigning things, you know, that you change your trading partner, you find a new one, you replace the goods and in some situations that actually benefits you. So that’s a situation in the United States where they do put this tariff on China, less goods coming from China, which means the US needs to make more goods at home. So, it actually stimulates the domestic economy in a sense. So, it just realigns things. And I think that’s why, you know, trying to predict it is a little bit unclear and maybe the impacts aren’t as bad as you might have thought.

Ryan Bridge
Where there’s a way, commerce will find a way to get through.

Andrew Curtayne
That’s correct.

Ryan Bridge
Hey, just on the geopolitics while we’re here, the war in Ukraine, and I know I’m just loving all sorts of stuff at you now, but the war in Ukraine, Donald Trump has said he’s going to fix this, he’s going to have a peace deal by Christmas, which would be fantastic. But the chances of that obviously are not great. What would be the implications if there was a resolution that they were able to agree to in terms of both gas coming out of Russia and into Europe, but also fuel, that kind of stuff? What would the implications be potentially for the global economy?

Andrew Curtayne
Yeah, it’s an interesting one, because we all probably remember back to when the war started and we saw gas prices and oil prices and soft commodities such as corn and wheat were all going through the roof. So, I guess a lot of people expect if you got the war, you know, a peace agreement coming out that maybe a lot of this reverses. I guess I could point out a couple of things. Largely the commodity prices have already normalized from the 2022 level we saw. Oil, for example, irrespective of sanctions being placed on Russia exporting oil and West not purchasing Russia oil, the oil is still finding its way into the market. So, Russia might produce somewhere between 8 to 10% of the world’s oil. It is just sending more of this oil to India and China. So, it’s finding its way into the market. I think gas you touched on, I think, is an area where you probably would see an impact and it should be positive for Europe.

You know, I need to caution that a peace agreement doesn’t mean the gas comes back in. So, at the moment, the gas is probably down around about 60 to 70% in terms of imports out of Russia into Europe from where it was prior to the war. And the gas price is somewhere between, it’s very volatile, but probably 100 to 150% higher or twice as high as it was pre the war. Now if you got an agreement where more gas could come back in, that’s certainly going to be helpful for Europe. But I’d caution that you actually do get that gas coming in too quickly.

Ryan Bridge
It’s not a done deal, is it? I mean, even if there is a peace agreement, is Europe going to want to jump back into bed with Putin and everything’s kumbaya again?

Andrew Curtayne
That’s right. There’s nothing like an energy crisis and people not being able to heat their homes to make them decide that they want that gas coming in.

Ryan Bridge
Yeah, hopefully we don’t quite feel it as bad as they have been in Europe here in New Zealand given the current conditions. Hey just while you’re here, what’s your background? Have you been living in New Zealand for a long time doing this or overseas?

Andrew Curtayne
I’ve been in finance for about 15, 16 years now but I started as a merger acquisitions banker at Goldman Sachs, then worked in London for five years at a hedge fund, so very similar job to what I’m doing now. Then I moved back to New Zealand about three years ago and joined Milford last year.

Ryan Bridge
Brilliant, well it’s excellent to have your insight and to have somebody of your calibre here with me, so I appreciate you coming on the show.

Andrew Curtayne
Not a problem, it’s a pleasure, thank you.

Ryan Bridge
That’s Milford’s Andrew Curtayne and don’t forget to like, subscribe, do whatever you’ve got to do to see and listen to this podcast and video cast. See you next week.

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