Why the markets didn't blink at Canberra's affray

Financial markets have so far brushed off the news that Australia has a new prime minister. The Australian dollar, bond yields and the share price index futures markets took their lead from the swings and roundabouts in China, Europe and of course the US.

The reason for the lack of market reaction has a few different layers.

Importantly, Kevin Rudd is yet to outline an economic agenda so the market players do not know, at this stage, whether the big picture themes of spending restraint, a trajectory to budget surplus within two years and a ‘steady as she goes’ approach to industrial relations and tax reform will remain unaltered.

Given the leadership change to Rudd from Julia Gillard was not policy based – it was a change based purely on the perception that a Rudd-led Labor Party would poll more favourably than with Gillard as leader – it is not yet clear whether there will in fact be any change in the policy agenda that will be of concern to financial markets.

Another perhaps more fundamentally important reason why the markets barely blinked was the perception that the Labor Party’s change to Rudd is unlikely to alter the scenario that there will be an Abbott-led government elected by the end of the year.

Certainly the betting markets have the Coalition a prohibitive $1.15 favourite to win the election, while Labor is $5.00. Quite clearly, the markets are more focused on the prospects of a Liberal-National Coalition within the next few months than what the Labor Party may do with its last few months in power.

Cherelle Murphy, senior economist at ANZ Bank indicated in a client note last night that “there should be little if any financial market or economic impact [but that] an earlier election may lift business and consumer confidence, which appears to have been weighed down by political uncertainty”.

This certainly appears to be the case with the recent trends in consumer sentiment and business expectations survey data being generally underwhelming.

As to the timing of the election, there is now no certainty that the election will be held on 14 September, a date that was nominated by Julia Gillard at the start of the year. Kevin Rudd can and probably will opt for a different date, although it is not clear whether he will choose to rush to the polls with an election as soon as August or wait until November, the last possible time for the election, to establish some authority in the political debate and regain the benefits of incumbency.

Pushing the date out to October or November may simply prolong the current period of hiatus for business and extend the soft path of growth for a few more months.

With Wayne Swan also stepping down, Australia will have a new treasurer. If as seems likely the role goes to Chris Bowen, markets can rest assured that the fiscal pragmatism that has been in place in recent years will be retained.

Aged only 40, Bowen has a solid grounding for the role of treasurer. A Rudd loyalist, Bowen was assistant treasurer for 18 months up to June 2009 and he broadened his experience as minister for competition and consumer affairs, financial services, superannuation and corporate law, human services, immigration and citizenship, tertiary education and small business. He would step into the big shoes of treasurer with some solid background.

There are a number of other issues which may yet come to have some impact on market sentiment.

Kevin Rudd indicated in his acceptance speech last night that he still wants the Australian economy to “make things”. In other words, he seems to be reiterating his long held belief that there is something inherently better with industries such as manufacturing over banking and finance, health or education. There is a risk in this that Rudd will drive a policy that has the government supporting manufacturing at a cost to the budget and the expense of other sectors of the economy.

Then there is Rudd’s as yet unknown view on the carbon price, mining tax, DisabilityCare, the so-called Gonski education reforms and other policy areas.

The financial market disinterest in the recent political ructions in Canberra is understandable and reasonable. But this doesn’t mean the markets will not be looking more closely at the unfolding economic policy debate over the next few months, because it might get interesting and something significant might pop up along the way.