Global share markets started the past week off strongly with US shares breaking out to new recovery highs, but gains were partly reversed later in the week
Despite strength early in the week, Australian shares fell on the back of worries about the growth outlook with telco, industrial, health and utility shares leading the decline. Bond yields generally fell but oil, metal and iron ore prices rose. The Australian dollar also rose above $US0.70 as the US dollar continued to fall.
Global markets faced worries about the economic recovery in the face of rising coronavirus cases and increasing US/China tensions albeit this still left US, Eurozone, Japanese and Chinese shares up.
COVID-19 still spreading
It was the same old, same old on the coronavirus front over the last week with an ongoing rising trend in new cases, particularly in emerging countries. Various developed countries have also been seeing renewed spikes including Japan, Hong Kong, Spain, France, Canada and Israel – so Australia is not alone.
There has been a bit of good news in the US though with the growth in new cases slowing, particularly in the south – maybe the mandated masks are starting to help.
The US is also continuing to see reduced hospitalisation and fatality rates compared to April reflecting the greater skew in cases towards younger people, better protections for older people and better treatments. This is important in potentially heading off the government mandating a general lockdown and/or people behaving as if there is one.
Victoria still a major concern
Unfortunately, the trend in new cases in Victoria has remained up, but NSW so far has managed to keep new cases down. It is clearly taking longer for the lockdown to work this time in Victoria – which may reflect more community transmission (as opposed to returning travellers) and less people taking the rules seriously. So far so good in NSW (although the 7-day rolling average case count remains elevated compared to a month ago) and its worth noting that new cases per million are running at 15 in Australia compared to a far higher 205 in the US.
The surge in new cases, the reversal of reopenings and the associated negative headlines are continuing to impact our weekly Economic Activity Trackers for the US and Australia, but so far at least it seems to have caused a stalling in the recovery rather than a new collapse. These activity trackers are based on high frequency data for things like restaurant bookings, confidence, retail foot traffic, box office takings, hotel bookings, credit card data, mobility indexes & jobs data.
Our Australian Economic Activity Tracker fell back again over the last week reflecting weakness in consumer confidence, restaurants, retail traffic and hotel bookings but credit card data rose and weakness in Victoria is being offset by strength in other states.
Fiscal stimulus a boost for markets
The past week saw more good news on the policy front. The US is still edging towards a new stimulus package – partly to extend enhanced unemployment benefit payments beyond the end of July. They may not make it by the end of the week but I suspect they will by early August given the threats to the recovery and the desire to avoid being seen to block measures to protect the economy. The European Union finally agreed a €750bn recovery Fund.
While it came with lots of resistance from the Frugal Four (Sweden, the Netherlands, Austria and Denmark) the European Union made a big leap towards a common fiscal policy – albeit from a very low base – with agreement on the €750bn Recovery Fund – albeit with more loans (€360bn) and less grants (€390bn) than originally planned. The common issuance of debt by the EC will be a big step forward. While it all came with lots of resistance the outcome is consistent with each new crisis (the 2011-12 debt crisis and now coronavirus) driving a more integrated Europe, rather than breaking it apart. This is all positive for the Euro and European assets.
Australia’s biggest post-war stimulus
In Australia, the Government extended the JobKeeper and JobSeeker programs, albeit at reduced rates, which along with the apprentice subsidies and JobTrainer program have added $22bn to stimulus measures bringing total coronavirus related stimulus to $174bn and leaving Australia at the top end of comparable countries in terms of coronavirus stimulus measures relative to GDP for this year.
These are “eye watering” numbers as was the $180bn projected budget deficit for 2020-21 unveiled by the Government. This is a record in terms of dollars and as a share of GDP at 9.7% is the highest since WWII. Ultimately, we expect it to be even higher at around $220bn as the Government unveils another $20bn in stimulus between now and the October budget and as revenue recovers more slowly than the Government expects.
If the economy were strong and we didn’t have coronavirus to contend with this would not be smart but we do and supporting the economy through this tough period is absolutely the right thing to do. Moreover, the starting point level of public debt in Australia is low relative to comparable countries, borrowing costs are very low, the Government is borrowing in Australian dollars not foreign currency, we are not dependent on foreign capital and the support programs are not a permanent increase in spending. So I am not too fussed about the implied rise in debt.
What are the negatives and positives for shares?
Here is a quick list. The negatives are that: new coronavirus cases are still rising; reopening is pausing or reversing in some cases; this is impacting confidence; at a time when unemployment is very high; earnings have taken a big hit; and US/China tensions are continuing to escalate (with the US closing China’s Houston Consulate, China closing the US’s Chengdu Consulate in retaliation) and Pompeo criticising China.
The positives are that: there have been favourable developments regarding coronavirus treatments and vaccines; the second wave so far in the US has been less deadly; several countries continue to contain the virus showing it can be done; China has traced out a Deep V recovery showing that it also can be done; the safe haven $US is falling which is normally a positive sign; monetary and fiscal policy remains ultra-easy; low interest rates and bond yields make shares look cheap; and there is a lot of cash on the sidelines
Our base case remains for the economic recovery to continue but for the Deep V rebound evident in much recent data to give way to a slower bumpier recovery going forward. Shares are still vulnerable to a further volatility, with renewed lockdowns and US/China tensions being the main risks. But the positives should keep any volatility to being a correction against a still rising trend.
Why is the Australian dollar so strong?
The $A has broken above $US0.70 having bottomed out at the height of the coronavirus panic in March at around $US0.55. Its being driven higher by a combination of a falling US dollar as safe haven demand for it recedes; the Fed printing more US dollars than the RBA is printing Australian dollars; rising commodity prices with iron ore above $US100/tonne; and maybe optimism that Australia will recover faster than the badly coronavirus hit US.
I expect it will continue to rise. At this point it’s still around fair value so not high enough to be an issue for the RBA but if it does rise so far that the RBA sees it as a threat to the recovery expect it to respond with more QE, not negative rates and foreign exchange intervention.
Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital