Markets thinking beyond The Lodge

Earlier this month, NAB and Woodside chairman Michael Chaney described the cooling of the resources boom and political manoeuvring ahead of the mid-September election as a "perfect storm" for business, but it was an almost perfect yawn on Wednesday as Kevin Rudd and Julia Gillard mobilised for their final leadership battle.

Earlier this month, NAB and Woodside chairman Michael Chaney described the cooling of the resources boom and political manoeuvring ahead of the mid-September election as a "perfect storm" for business, but it was an almost perfect yawn on Wednesday as Kevin Rudd and Julia Gillard mobilised for their final leadership battle.

News that Rudd supporters were circulating a petition that would lead to a special caucus meeting and a leadership spill emerged online in Fairfax Media and on The Guardian's Australian website just after 12.30pm.

Share traders did nothing with the news after taking prices higher in the morning on the back of another raft of solid economic data in the United States.

By the close of trading when a 7pm leadership showdown had been confirmed by Gillard, the S&P/ASX 200 share index was still up where it was when news of the new putsch broke.

Currency traders took the Australian dollar down by about US0.16¢ to US92.4¢ on the early reports, but reclaimed the ground soon after, and took it above US93¢ in the evening as Rudd reclaimed the leadership.

When Chaney offered his perfect storm analogy, a September 14 election date had been known for more than four months, and the result, a landslide loss for Labor, was considered a foregone conclusion.

The usual end-of-term glut of bills was looming in Canberra and it contained some things that businesses didn't like - Australian labour market testing as a precondition for 457 worker visas, for example - but there was no anti-business legislative tsunami looming.

Now there is more uncertainty, about the election result, and the lead-in to it. On Wednesday night, Rudd was expected to confirm that he would go to the polls early, on August 24, to capture a honeymoon swing to Labor. An early election could have been triggered anyway if the independent bloc that anchored the Gillard minority government fell apart after the coup.

All in all, what looked to be a funereal procession by Labor to a September flogging becomes something far more difficult to predict.

So why weren't the markets moved as Rudd's challenge gathered momentum on Wednesday? Mainly, I suspect, because more pressing matters have captured their attention.

Many market players will see Labor's leadership struggle as a deckchairs-on-the-Titanic exercise that narrows the Coalition's probable winning margin, at best.

Senior ministerial resignations, beginning with Treasurer Wayne Swan, are also irrelevant on that view, but it is a view that will be tested by the polls that follow the change.

If Rudd significantly lifts Labor's standing after promising less restrictive fiscal policy than an Abbott government would deliver, a market reaction could come at that time.

Most market denizens will, however, believe - with some justification given recent events - that Australia's fortunes and the outlook for the local markets are going to be decided elsewhere.

Questions about the durability of the still fledgling global recovery from the global financial crisis if the Fed begins backing out quantitative easing; Europe's ability to keep a lid on its sovereign debt servicing obligations as the Fed pushes sovereign yields higher; and Beijing's ability to maintain 8 per cent growth or better without feeding speculative lending in the property market and elsewhere are more important to investors right now than Canberra's machinations.

The sharemarket rise that was defended by investors on Wednesday as the leadership battle flared was, for example, built on encouraging news about the US economy, and soothing news from two Federal Reserve officials about the Fed's plans to moderate monetary stimulus.

Rises in consumer confidence, durable goods orders and homes sales all beat expectations, and Dallas Federal Bank president Richard Fisher said the Fed was considering "dialling back" quantitative easing, not suddenly withdrawing it.

Minneapolis Fed president Narayana Kocherlakota said monetary policy would continue to be supportive for "a considerable time" after QE ended.

The markets were always going to welcome a move to bring the election date forward.

Business leaders talk about "build it and they will come" strategies, but the reality is business investment follows demand rather than leading it.

Business credit rose by a bare 0.2 per cent in April after decreasing by 0.1 per cent in March. In the year to April, it rose by a feeble 1.4 per cent.

The level of borrowing and investing isn't going to pick up until business sees a sustainable lift in household demand.

Political stability that will only be delivered in the end by a decisive election outcome is one of the preconditions for that to occur.

It's just not the only question the markets want answered, and after the Fed's earth-moving QE decision last week, not the biggest one.

mmaiden@fairfaxmedia.com.au