The Coalition winning the so-called "miracle" election may be putting a fire under our market, but there's a bigger factor that could keep Australian risk assets running higher for longer.
I had initially thought that the bounce would be short and sharp as Prime Minister Scott Morrison has to work with cross benchers to form government and pass legislation.
However, there're reports that the Coalition may have won enough seats to govern in their own right (at least in the lower house). I still think the election results will play second fiddle to global macro headwinds but the market rally may not be as short-lived as I had initially expected.
A$ more telling about market outlook than shares
It isn't only property stocks and health insurers that have jumped on the "miracle" election win by the Coalition government on the weekend.
While the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index jumped 1.7% to a more than decade high of 6,470 points in morning trade with Medibank Private Ltd (ASX: MPL) share price, NIB Holdings Limited (ASX: NHF) share price and Westpac Banking Corp (ASX: WBC) share price topping the leadboard, the Australian dollar is also making a decent bounce.
The Aussie jumped above 69 US cents on the first day of trade after the federal election after slumping to a three-and-a-half year low of 68.7 US cents last week.
I had expected a bigger reaction but I believe the modest move by the Aussie battler better reflects the headwinds markets still face despite the investor-friendly Conservatives holding on to government in this country with an increased majority.
Australians will continue to enjoy generous tax concessions after federal Labor lost the election they couldn't lose (at least that's what opinion polls had wrongly asserted), but this won't be enough to offset the brewing trade war between the US and China and weak wages growth and high household debt in Australia.
Lack of broad-based support a worry
In fact, the big rally on the ASX is triggered by the relief buying of big banks and other financials while most other sectors are either flat of have slipped into the red.
This lack of a broad-based rally is a red flag as it suggests that the bounce may not be enduring, in my view.
However, the election results may have temporarily put a floor to the Australian dollar as markets have priced in a Labor federal government and at least one interest rate cut by the Reserve Bank of Australia (RBA).
Foolish takeaway
I don't think the return of the Scott Morrison government will change the RBA's rate cut bias but this in itself shouldn't cause the Aussie to fall further (unless our central bankers become more dovish than expected in the coming weeks), while Aussie dollar bulls may use the election as a reason to buy our beaten down currency, which has slumped around 8% over the past year.
The Liberal-National Coalition are seen as better economic managers and have put bigger tax cuts on the agenda, which is stimulatory for our economy. While Labor had supported most of these tax cuts, its push to remove tax concessions and lift taxes for some Australians would have had the opposite effect.
Normura Holdings Inc. believes that business sentiment will improve from here, according to Bloomberg, while the ABC is predicting that the Scott Morrison government will win a 77-seat majority.
This means a more stable government, something investors crave but couldn't get for a long while.
To me, this is the most significant takeaway from the federal election for Australian risk assets – not so much a Labor defeat.
