Another week of volatility in investment markets but it’s both up and down volatility on a day to day basis as opposed to just straight down as was the case up until a couple of weeks ago
5 April 2020 | Shane Oliver, AMP Capital (IMAGE: Christine Roy)
For the week US shares fell 2.1%, Eurozone shares fell 2.2% and Japanese shares fell 8.1% which saw them give up some of their gains from the previous week but hold above their lows.
However, Chinese rose 0.1% and Australian shares rose 4.7%, with the latter playing a bit of catchup and getting a boost from the Australian Government’s massive wage subsidy program. Bond yields fell in the US, UK and Australia but they rose in Europe.
Commodity prices were mixed with a surge in oil prices (albeit only to $US28/barrel) on reports Saudi Arabia and Russia are ready to cut production and copper and iron ore prices fell. The $A fell back below $US0.60 as the $US headed higher again.
Here’s the bad news
First, new coronavirus cases globally are continuing to rise, notably in the US with Europe showing signs of stabilising.
While China seems to have got the outbreak under control it continues to have some problems with a rise in imported cases (that led a week ago to a ban on foreign travellers) and it put a small county (Jia) back under lockdown after a transmission from an asymptomatic doctor highlighting the problem of infected people with no symptoms being able to spread the virus. China also started reporting asymptomatic cases of which there are around 1,400.
Spain and Switzerland now have more cases per head of population than Italy. Cases per million people are rising rapidly in Germany, France, the US and UK but Australia may be joining Korea, Singapore, China and Japan in being more successful in stabilising the number of cases.
Second, the reported death rate from coronavirus is still rising with some countries continuing to see their health system overwhelmed and not just by older people. As a result, the global mortality rate has now risen to 5.2%, with Italy’s rate now 12.1%, Spain’s now 9.2% and the UK 8.7%.
Third, to control the virus and take pressure off hospitals social distancing measures are intensifying (including in Australia) and getting extended (in Germany and Italy).
Finally, this is increasingly showing up in a huge hit to global economic activity as evident in sharp falls in consumer confidence, surging unemployment claims in the US and even plunging auction clearance rates in Australia (although admittedly that was rather distorted).
But there is some good news
First, while share markets remain highly volatile the volatility is now both up and down rather than just down and they have had two “better” weeks despite very bad economic news. After circa 35% top to bottom falls a lot of bad news had been factored in which is partly why markets have been able to look through very poor economic data releases.
Second, Italy has now seen the number of new cases trend down for nearly two weeks adding to confidence that its lock down from 9th March may be working. Out of interest it may be following a similar pattern to China with a rough lag of 11 to 21 days between the lockdown and the peak in new cases (depending how the peak is defined).
Following the Chinese experience some relaxation of the Italian lockdown may be possible later this month. Spain also appears to have stabilised the number of new cases over the last week. (Note that while some question the reliability of China’s COVID-19 case data – partly driven by political motives – directionally it looks roughly right and lines up with President Xi’s March 10 visit to Wuhan and the easing of its lockdown/restart of its economy.)
Chinese economic recovery underway
Third, the Chinese economy is gradually returning to normal with daily activity indicators for traffic congestion, subway use, coal demand at power stations and property sales continuing to trend up. Reflecting this China’s PMI’s rebounded to around normal levels in March although this just appears to show that conditions improved compared to February rather than indicating that activity is back to normal.
A pick-up in Korean exports in March provides confirmation of China’s pick up as stronger exports to China largely drove it. Two risks for China remain a second wave from say imported cases or asymptomatic people and weak exports as the rest of the world slows.
But the Chinese experience does indicate that there is light at the end of the tunnel if we are rigorous in implementing a shutdown and support businesses and people through it.
Stimulus measures ramped-up dramatically
Having signed off on a $US2 trillion package Trump and Congress are moving towards another big stimulus package focussed on supporting households and businesses and infrastructure.
China announced more monetary easing and looks set to do more fiscal stimulus amounting to around 5% of GDP.
The EU looks to be headed towards a compromise solution on providing fiscal support for Italy.
The Australian Government announced a third fiscal support package centred on a wage subsidy for around 6 million workers costing $130bn over six months bringing total fiscal stimulus to be pumped into the economy in the year ahead to just over $200bn or 10% of GDP.
There have now been more than 270 stimulus announcements around the world. Central banks and governments appear to remain committed to doing “whatever it takes” to limit the economic impact on the economy and ensure a decent recovery (although a laggard remains the EU where a joint response to fiscal support is lacking leaving the ECB to fill the void).
We still need evidence the virus, and its economic impact, will come under control
before we can be confident shares have bottomed. Shares have performed better over the last two weeks, but we saw periods of strength in the GFC before the ultimate bottom was in.
Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital