Last week was another big week in the global financial markets. Locally, the Australian market clawed back all of the losses from last Friday to rise by the most in 40 years. The index surged late in Monday’s trade, led by a spike in consumer-sensitive stocks as the government signalled it would do whatever it takes to save the economy. This is mainly attributable to the announcement of the Federal Government’s Job Keeper policy.
The good news
Significant new policy stimulus around the world has been announced:
- In the US, Congress passed a US$2 trillion support package, amounting to about 10% of US GDP. In addition, the Federal Reserve announced that its bond-buying program will be open-ended and that they will also extend support to the credit market through purchases and a special lending facility, as well as to the mortgage-backed market.
- In Europe, the ECB said it will buy unlimited amounts of eligible bonds from member countries.
- The UK government announced stimulus of around 10% of GDP.
- Here in Australia, Federal Government stimulus announced so far is around 10% of GDP with State Governments also committing further funding. The Federal Government’s unprecedented new Job Keeper payment will save jobs in businesses of all sizes and industries. This initiative will maintain crucial employer-employee relationships in the essential recovery phase to come.
China has said that the new cases of COVID-19 they are seeing are from overseas visitors. This has prompted a ban on all visitors coming into China. Beijing is encouraging people to get back to work with early indications suggesting that China is operating at around 50-75% of capacity. China needs to see around 90% of capacity being used in order to get meaningful GDP growth.
The not so good news
- The virus continues to spread within affected countries. The weekly number of new cases has stopped falling in South Korea. In Japan, new infections have spiked up sharply after seeming to have peaked a few weeks ago. In the US, UK, Australia and across Europe there is no sign of a peak yet. The US now has the highest level of cases in the world.
- A further tightening of social distancing policies in a number of countries around the world, including Australia, the US, the UK, Germany, India and Japan.
- Prime Minister Scott Morrison said he expects social distancing restrictions to be in place for up to 6 months. This is longer than previously expected and partly reflects the fact that we are heading into our winter flu season.
- Australian consumer confidence declined by 9.8 per cent over the past week and is now at its lowest level since the inception of the survey in 1973. This sharp deterioration in sentiment is a reflection of the outlook of economic conditions, family finances and household spending.
- Early survey data on manufacturing and service sector activity around the world shows very steep falls in March. Readings for a number of countries, including Japan, Germany, France, the UK and Australia are at record lows.
- In the Eurozone, there are the persistent problems about whether the stronger countries have the will and the means to support the weaker countries. This is especially difficult because fiscal policy operates at a country level rather than at a Eurozone level.
- Crude oil prices were crunched again on Monday, falling to the lowest level in 18-years with global demand evaporating as countries go into lock-down due to the COVIC-19 pandemic. Usually, a fall in oil prices would be welcomed by consumers and firms due to the lower prices and costs. However, the current fall is due to expectations of a sharp drop in travel and economic recession from the pandemic we are facing. There is little expectation that the lower oil prices will have any positive economic effect. If people cut back on travel, cheaper petrol doesn’t make much difference. If people see a fall in income because they are out of work, cheaper oil prices are only a small compensation.
Chart 1 shows financial markets performed better last week, with equities around the world rallying in response to the stimulus measures being announced. This looks more like a relief rally reflecting the markets’ state of mind. Despite last week’s rally, equity markets are still well below where they were in mid-February – see Chart 2.
Source: Thomson Reuters Datastream
Source: Thomson Reuters Datastream
It is still too soon to know if the stimulus packages being announced around the world are going to be enough, especially since the virus has not yet peaked. There have been suggestions that some of the rally in the US was due to Trump saying they will be open for Easter – a highly unrealistic ambition. According to the Atlanta Federal Reserve, “at present, we simply don’t know the extent of the overall disruption to the economy. We are still months away from confidently gauging COVID-19’s impact”
In this environment, a continued focus on capital preservation is key. Whilst markets are a long way from being out of the woods, green shoots are emerging in some segments. However, the future is still too uncertain for anyone to make a statement that markets are “risk-on”. We will continue to monitor the situation very closely. When the time comes for a more positive stance on risk assets, the defensive measures currently in place will be assessed for potential unwinding.
This document and its contents are general in nature and do not constitute or convey personal advice. It has been prepared without consideration of anyone’s financial situation, needs or financial objectives. Formal advice should be sought before acting on the areas discussed. This document is a private communication and is not intended for public circulation other than to authorised representatives of the Madison Financial Group and their clients. The authors and distributors of this document accept no liability for any loss or damage suffered by any person as a result of that person, or any other person, placing any reliance on the contents of this document.
 A market where stocks are outperforming bonds is said to be a risk-on environment. When stocks are selling off and investors run for shelter to bonds or gold, the environment is said to be risk-off