Mixed news on the coronavirus front continues to feed into a bumpy ride for global financial markets
Share markets pushed higher again over the past week on the back of a declining number of new coronavirus cases in several countries raising the prospect of a relaxation in shutdowns, as policy stimulus measures continued to provide confidence that the economic downturn may be relatively short and as talk of a cut in global oil production boosted energy shares.
US shares rose 12.1% for their best week since 1974, Eurozone shares gained 8.8%, Japanese shares rose 9.4% and Chinese shares rose 1.5%. While Australian banks were hit on talk of dividend suspensions Australian shares rose 6.3% for the week helped by the strong global lead with particularly solid gains in property and energy shares.
From their lows around 23rd March US shares are up 25% and have reversed nearly half of their plunge, global shares are up 22% and Australian shares are up 19%. Consistent with improved investor sentiment, bond yields rose as did copper and iron ore prices and the $A rose above $US0.63 as the $US fell. The oil price fell though on doubt as to whether oil production cuts would be enough to offset the slump in global oil demand.
No sign of global infections peaking
The past week yet again saw a continuing rise in the number of coronavirus cases globally, a still rising death rate (it’s now 12.7% in Italy and 11.7% in the UK) and bleaker economic data. However, there continues to be better news at the margin regarding the virus, notably in hot spots like Italy and even New York, as well as Australia.
While the total number of reported coronavirus cases globally is continuing to rise, the number of new cases may be levelling off (although its complicated by a big spike in French cases early in the past week).
This may reflect an increasing stringency in lockdowns globally. Nearly 80% of 41 major countries now have severe lockdowns in place, including Australia. While this means short-term economic pain it also means a greater chance of controlling the virus earlier.
Government restrictions on mobility
There is increasing evidence that this is working in Europe. While France still looks problematic a downtrend in new cases is evident in Italy, Spain, Germany, the Netherlands, Austria and Switzerland.
While the US is still seeing a rising trend, the number of new cases in New York has slowed.
Australia is now clearly seeing a downtrend in new cases in response to social distancing policies. In fact, this appears to be occurring faster than the Government had assumed.
As a former journalist friend observed, “maybe Australia slipped on a banana peel just as the bullet was about to hit.” Or its down to less congested living and warmer weather. Then again that’s probably too cynical given the lockdown that has been put in place and enforced.
This has seen Australia’s total number of cases per million people remain low and not dissimilar to Asian countries that have been relatively successful in stabilising the number of cases.
Out of interest, a ranking of how well countries have grappled with coronavirus based on the percentage of cases that have recovered, total cases relative to the outbreak’s duration, active cases per capita and tests per capita ranks Australia at number 3, behind only China and South Korea out of 30 countries.
Italy is ranked 22nd, the US is ranked 23rd and the UK is ranked very poorly at 27th.
A possible relaxing of lockdowns
With parts of Europe and Australia now following a similar pattern with new cases to that experienced by China that saw a peak in new cases around 11 to 21 days after its lockdown, it’s possible that like China they will be able to start relaxing the lockdown in a month or so.
Of course in the absence of a vaccine a full relaxation would be unwise given the risk of a second wave of infections, as was the case in 1918 with Spanish Flu. However, provided international travel remains banned (removing the threat of imported cases); low-level community transmission cases are rigoursly quarantined, and contacts traced, then some relaxation will be likely.
Consequently, we have to keep the number of cases going down. If this is the case, then economic activity should bottom this quarter allowing the start of a gradual recovery through the second half. Fingers crossed!
Mass testing of the population that shows a high level of antibodies to COVID-19 and hence significant “herd immunity” may permit a faster and more confident relaxation but such testing is still a way off.
Policy support also on the rise
Policy support continued to ramp up over the last week and this is continuing to help tip the risks away from coronavirus shutdowns causing a long and extended recession/depression.
US political leaders are now working on another stimulus package to be at least $US1 trillion (4.5% of GDP).
Japan announced a new $US1 trillion stimulus package that contains roughly 3.5% of GDP in spending (as opposed to loans).
The ECB announced that it will reduce its credit standards for lending through the crisis. This will further encourage access to its cheap bank funding program and make it easier for countries like Greece.
“Whatever it takes” to limit the impact on the economy and ensure a decent recovery remains the mantra of global policy makers. If actual and currently proposed spending and tax break measures are allowed for global policy stimulus is now running over 4% of global GDP, far great than seen in the GFC. Note that this does not include government lending or loan guarantees, which may turn out to be “spending”.
Where are shares headed?
It’s still too early to say that shares have bottomed as there is still a lot of bad news to come. But increasing policy support against the backdrop of increasingly positive signs that suppression is working and it may be possible to relax lockdowns in the next month or so are positive signs that we have seen the low or have come close to the low.
Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital