Market woes overshadow U.S. election

LONDON (Reuters) - Evidence of a weakening economy and further global efforts to avert recession dominate financial markets this week, so much so that the U.S. presidential election on Tuesday is almost taking a back seat.

The week is packed full of events. Britain, the euro zone and Australia are set to join a global easing cycle by cutting interest rates, following moves in the United States, Japan, Norway, Hong Kong, China, Taiwan and India last week.

Expectations of further global efforts have resulted in MSCI's benchmark world stocks index showing its best weekly performance in the past 20 years last week.

However, this week's key corporate earnings and data could bring investors back to reality -- where major economies may be already in recession.

"Governments around the world are pulling out all stops to save the system and keep it running at all costs," said John Hardy, market strategist at Saxobank.

"It is that the trajectory of policy response will be paramount in understanding how we navigate the wreckage in the aftermath of the greatest financial bubble in world history."

Given this backdrop, the U.S. presidential election is unlikely to be a major immediate market mover with a victory of Democrat Barack Obama largely expected. Obama leads Republican John McCain in national opinion polls.

"With everything else going on, it almost makes a potential change in the U.S. government immaterial," said Glyn Jones, chief investment officer of London-based asset manager P-Solve.

"Their hands are so tied that they will have to be committed to the recapitalization of the capital system. Whoever wins will work with the incumbent administration and any transition will be made as seamless as possible."

Major European banks such as UBS and BNP Paribas and key industrial firms such as Cisco Systems release their quarterly earnings this week. Topping the data calendar is the U.S. jobs report on Friday.

Wrapping up the week, finance chiefs from Group of 20 key economies in Brazil at the end of the week will intensify worldwide efforts to prevent the worst financial crisis in 80 years from damaging the world economy.

The ministers will lay the groundwork for a summit on November 15 in Washington where world leaders will discuss how to tackle the financial crisis.

Investors are hoping for further details from Belarus, Turkey, Pakistan and Serbia, Hungary and Ukraine which are in talks with the International Monetary Fund for emergency funding.

NO TURNING POINT YET

Despite a stellar weekly performance, world stocks did have their worst month ever in October, falling almost 20 percent.

There is little debate that stocks are cheap. State Street estimates that adjusted for leverage and cyclicality, the U.S. earnings multiple is 26 percent below its 147-year average.

It also reckons the 30-year history of MSCI equity index suggests global equities are 39 percent cheaper than their long-term average.

However, even with cheap valuation, the U.S. financial firm's cross-border institutional investment in developed equity markets remains at a record low in the past month.

"These long-term allocators of capital are already the biggest players in equity markets, though flows suggest they are not yet adding to their holdings," State Street said in a note to clients.

"The point at which institutions start buying may mark the turning point in the current market crisis. There have been false dawns."

ISSUES FACING NEW PRESIDENT

Whoever wins, the stake for the new president is huge as consumers cut spending, jobs disappear and credit conditions tighten in an economy which suffered its sharpest contraction in seven years in the third quarter.

Obama has proposed an economic stimulus plan that some experts estimate could cost as much as $190 billion.

"We anticipate more taxes, more regulation, a bigger government and a massive budget deficit," said Peter Anderson, Chief Investment Officer of U.S. equities at RCM, part of Allianz Global Investors.

"This sets the stage for a potential inflation bubble of massive dimensions, but that is unlikely to occur until 2011-2012 at the earliest. It is in that environment that the dollar is likely to resume its decline against both the euro and yen."

Cormac Weldon, head of U.S. equities at UK-based asset manager Threadneedle expects a Democrats win would benefit smaller biotech companies while a Republic win will be positive for utilities and pharmaceutical sectors.