IG Markets - Morning Thoughts

IG Markets - Morning Thoughts

As it is budget night we thought it would be appropriate to do a very quick synopsis of what to expect rather than the normal market note.

Tonight sees the release of one of the most interesting budgets in recent history, and here’s why.

It is an election year with a defined election date. We have a government that is looking for its third term, but is trailing heavily in the polls, and we have an opposition that is yet to fully release its policies and funding models for the future, but can do no wrong.

This would normally allow the incumbent government to find spending schemes that would be seen as socially and economically beneficial to the household - but not this year.

This year, the budget has political constraints on it. The government was, six months ago, publicly stating that Australia would find itself in surplus, which it will reach. It also said that new taxes will bring in substantial revenues, which they haven’t, and that welfare payments would offset any new taxes brought in to help with ‘the cost of living’, which are being scrapped. Politically, this is a nightmare in an election year.

So what to expect tonight; the Prime Minister has already stated that the additional decline in revenue could top as much as $12 billion. This, coupled with an already-known $7 billion decline in revenue means the budget is looking at a $17 billion decline from last year’s budget estimates.

The main reasons for the reductions in revenue come from the high AUD and weak export prices. But it is broader than that: it comes down to real GDP versus nominal GDP. In short, real GDP takes the volume of goods and services to work out GDP. Nominal GDP takes volume and prices. Last year the budget expected nominal GDP to grow at 5%; this was downgraded to 4% in October then down to 2% at the start of the year, while real GDP is holding at 3%. This mean nominal GDP is lower than real GDP for the fourth time in history, the last time was 2008 and before that was 1995. The point is that revenue comes from taxation, which is based on price not volume. Therefore, revenue is related to nominal GDP not real GDP (which is what the discussion has been about), and the decline to 2% is killing the government’s bottom-line.

This leads us to cuts. Leaks have being coming thick and fast, and we already know that Family Benefit A, which should have been supported by the Mining Resources Rent Tax (MRRT), has been scrapped due to low returns. The loss of revenue from the Carbon Tax has also seen the future rise in the tax-free threshold scrapped as well. What we may see tonight is further scrapping of welfare payments to middle-class homes, plus we also know that senior public servants will have pay cuts over the next four years, and this may get wider. We also know that superannuation is in the cross hairs; the changes to super will be the biggest game changer to taxation since it was introduced.

These savings have been implemented to introduce and maintain the three major legacy sending programmes the government wants. The National Disability Insurance Scheme (NDIS), the Gonski Education Funding Scheme and from last night - nation building through new infrastructure projects. We know how the NDIS will be funded in part with an increase to the Medicare levy, but that only makes up 40%; the Gonski Funding Programme was to come from the MRRT and other programmes, so this will need to be funded from other cuts (‘savings’), while the newly-leaked infrastructure project will have more details released tonight. However, with a $17 billion revenue deficit, cuts could be hard.

Whatever your political view, this budget will be one of the strangest in memory as it will not be your typical election-year budget. The government could go for broke and spend up big (this is likely - considering its mantra is jobs and economic growth). It could be measured and cut the middle to help the lower household, but take money out of the economy. Or (and is this is the least likely) it could cut ‘waste’ programmes and look to pick up revenue through new taxation changes. At 7:30 (AEST) tonight we will find out.

Ahead of the open, we are calling the ASX 200 up five points to 5215 (+0.09%).The slight positive call may be to do with the AUD being below parity, so watch US-exposed stocks to have a possible bounce.

With WBC and ANZ now ex-dividend, the last one to come is NAB, and after rallying 1.6% yesterday, it may find further support this morning heading into this event. BHP’s ADR is suggesting the security will drop 14 cents today to $34.34 (-0.41%) as iron ore fell back further to $129.40. While gold stocks look like being hit the hardest today, as the precious metal continues to slip and brokers continue to come out and downgrade their outlook for the sector, watch NCM and the like to pull back once more.

Market Price at 7:00am AEST Change Since Australian Market Close Percentage Change
AUD/USD 0.9950 -0.0047 -0.47%
ASX (cash) 5215 5 0.09%
US DOW (cash) 15089 12 0.08%
US S&P (cash) 1634.7 5.6 0.34%
UK FTSE (cash) 6641 19 0.29%
German DAX (cash) 8285 5 0.06%
Japan 225 (cash) 14864 84 0.57%
Rio Tinto Plc (London) 30.01 -0.36 -1.19%
BHP Billiton Plc (London) 19.12 -0.05 -0.29%
BHP Billiton Ltd. ADR (US) (AUD) 34.34 -0.14 -0.41%
US Light Crude Oil (June) 95.03 -0.34 -0.36%
Gold (spot) 1430.65 -6.3 -0.44%
Aluminium (London) 1867 -3 -0.16%
Copper (London) 7415 40 0.54%
Nickel (London) 15280 -80 -0.52%
Zinc (London) 1863 4 0.22%
Iron Ore 129.40 -0.2 -0.15%

IG Markets provides round-the-clock CFD trading on currencies, indices and commodities. The levels quoted in this email are the latest tradeable price for each market. The net change for each market is referenced from the corresponding tradeable level at yesterday’s close of the ASX. These levels are specifically tailored for the Australian trader and take into account the 24hr nature of global markets.

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