Political turmoil from a financial perspective

There is an ongoing discussion about the political consequences of having Kevin Rudd as Prime Minister. John Craig from Bell Potter explores what it means for the financial markets.

Financial markets have been somewhat relieved with the recent turmoil in Australian politics. Financial markets seem to be more strongly favouring the coalition than the Government, particularly with the unpopular mining tax and carbon tax.

The change of Prime Minister and the short period of time to the next Federal Election have also helped keep volatility in Australian markets to a minimum.  This subdued activity will most likely continue, and markets have already overcome the swearing in of Prime Minister Rudd and his cabinet.

The Australian Dollar has been generally weak in the past month or so and has been under the influence of a stronger US Dollar. During the political turmoil in Government the currency was not influenced at all by events in Canberra, nor should it be, I would think.

The Australian Stock market has also snubbed affairs in the Capital, and despite some signs of change to the two most contentious policies of former Prime Minister Julia Gillard there will not be enough time to unravel the mining tax and the carbon tax. Equity markets have been a little soft over the change of the PM, but in my opinion that softness is in line with global market moves.

Besides, financial markets are assuming that there will be a change of Government in the next three months and that the mining and carbon taxes will be then thrown out.

Interest rates will not be affected by Canberra, and despite the fact that a new Treasurer has been sworn in, the independence of the RBA will be maintained, and a new treasurer is secondary to monetary policy.

Moody has just reaffirmed Australia AAA rating, “based on very high economic resiliency, very high government financial strength, and very low susceptibility to event risk”

So in summary, while there has been some activity in Government circles over the past week, markets have continued in their own direction and have, in the whole, ignored events in the Capital. And so they should.

John Craig works with the Bell Potter group in their futures division and has a focus on the RBA and interest rates. He writes a daily on overnight market moves for Bell Potter clients. John is a former director of the Sydney Futures Exchange and has held management positions with several firms during his long financial market career.