Central banks ease and government fiscal injections on the way

APAC News COVID19 market turmoil headlines at newsagent in Sydney Quen Victoria Building

Share markets had a very volatile week, helped initially by more policy easing globally with both the Fed and the RBA cutting interest rates but only to get hit again by intensifying coronavirus concerns

7 March 2020 | Shane Oliver, AMP Capital

After a week in which global market movements were dominated by reactions to COVID-19, Chinese shares made it back to their January high and surged 5% through the week. Share on Wall Street still managed to rise 0.6%, Eurozone shares fell 3.1%, Japanese shares fell 1.9% and Australian shares fell 2.7%.

From their recent highs to recent lows US shares have fallen 13%, Eurozone shares have lost 16%, Japanese shares have fallen 14% and Australian shares have lost 13%.

The differing views on COVID-19

Coronavirus dominates most conversations now and it seems there are two extreme views.

Some see it as just a bad flu – which in the 2017-18 US flu season saw 44.8 million infected and 61,099 deaths – and can’t see what the fuss is all about.

Others think that it will trigger a major humanitarian and economic catastrophe. The optimist in me wants to lean to the first interpretation. While COVID-19 is more deadly than regular flu the actual death rate may be 1% or lower if those who get the virus but don’t get sick enough to seek help are included and its likely to be less contagious.

However, I also have to concede that I just don’t know for sure. There is much that is unknown about the virus itself and how long it will continue to spread. And there is also the human or behavioural reaction and the media frenzy that is helping to inflame it.

Just look at the toilet paper frenzy – with the destruction of a truck load of toilet paper becoming a major national story and people getting into fights over it – to see that this can have a real economic effect even before the virus has really taken hold in Australia.

COVID-19 data little changed over the past week

Unfortunately, on the coronavirus data front it was more of the same over the last week. The number of new cases and deaths in China is continuing to trend down (which is good news) but the number of new cases outside China is continuing to rise rapidly (which is clearly bad news).

Graph of new reported worldwide cases of COVID 19 for the week ending 6 March 2020, sources PRC Health Commission, Bloomberg and AMP Capital

Italy, Korea and Iran remain problematic, but the number of cases is also steadily rising in France, Germany, the United States and Australia.

Singapore and Hong Kong seem to be containing the spread of COVID-19 recently, showing it can be done.

Panic and uncertainty are hitting the economy

While there may be a boom in demand for hand sanitisers and toilet paper, the spread of the virus globally and the disruption that containment measures are causing is continuing to increase the risk of a longer and deeper hit to global and Australian economic activity. As such, it’s still too early to say that shares, commodity prices and bond yields have bottomed.

On the positive side shares have had 12% plus falls, they are now very cheap compared to lower bond yields and interest rates, investor sentiment is now negative which is positive from a contrarian point of view.

Chinese shares have been able to rally back all the way to pre-virus levels. The US dollar has now fallen back sharply removing the risk of a “dollar funding” crisis. In addition olicy stimulus has ramped up dramatically over the last week with central banks led by the RBA and the Fed moving to cut rates and governments starting to boost spending as well.

While the Fed really got the ball rolling on rate cuts, Australia’s Reserve Bank snuck in first with a 0.25% cut followed by 0.5% cuts from the Fed and the Bank of Canada and other central banks look set to ease too. The US also showed that fiscal support is possible in an election year – with an $8 billion health package.

Although its less than 0.1% of GDP, White House economic adviser Larry Kudlow has indicated that further limited fiscal stimulus is being considered. While it may take a while to get Congressional agreement it’s hard to see either side of politics wanting to be seen as blocking help for the economy at this point.

Markets looking to see when worst is over

While these things are all positive, and maybe shares have already factored in the worst, we really need to see evidence that the outbreak is coming under control or will have a limited economic impact. At this point this is still lacking.

Policy stimulus and support for badly hit businesses (to prevent insolvency) is necessary to minimise the economic fallout and super charge the eventual recovery, but it won’t stop the virus and the short-term economic disruption it is causing.

Key to watch for in the short-term are signs that the number of new cases (outside China) has peaked (as per the first chart) and/or indications that a vaccine or anti-virals will soon bring it under control or perhaps a refocus by authorities away from containment to just focussing on treatment of the really ill (as occurred with the albeit less deadly swine flu a decade ago).

Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital