Submitted by Eleanor Creagh of Saxobank
Summary: After the Feds actions overnight, risk is bouncing in Asia and traders are optimistic on an incoming US fiscal relief package
After yesterday’s Asia bloodbath, despite US stocks closing lower as the Senate again stalls on the stimulus bill, the region is set to hit pause on further declines. US futures are in the green and Asian indices trading higher. The NZX 50, Nikkei 225 and Kospi are leading the pack with gains of more than 6% across the board. Throughout the Asia trading day, reports that Republicans and Democrats are moving closer on the fiscal rescue bill has buoyed risk appetite further. If, as Treasury Secretary Steve Mnuchin has stated, a deal is reached soon the stage is set for risk sentiment to bounce in the short term. Particularly as the broad based dollar strength that compounded stresses last week has eased somewhat as panic subsides.
The VIX closed lower overnight, declining to 61.59, illustrating calmer markets relative to the panic deleveraging of the prior week. Although again we caution, this does not necessarily represent a true bottom, rather the subsiding of initial stress levels paving the way for a relief rally. There is likely to be ongoing negative news flow and economic implications that will need to be discounted down the track, but perhaps in a more measured way.
The move to QE Infinity by the US Fed, the world’s de facto central bank/lender of last resort, is one for the history books. The rulebook has gone out the window, a testament to the unprecedented, simultaneous supply and demand shock inflicted by the COVID-19 crisis. Overnight the Fed went all in and launched a tsunami of rescue measures to help shield the US economy from downside presented by the COVID-19 outbreak and the measures to contain its spread and guarantee sufficient flows of credit through the financial system, in attempt to forestall a global credit crunch. QE infinity and beyond, encompassing unlimited purchases of Treasury debt and mortgage-backed securities, is just one part of the new measures. Gold rebounding powerfully on the moves overnight, with the strength continuing in the Asia session and gold hitting a record high in AUD. For more on the new actions and open-ended QE, our CIO Steen Jakobsen has the full rundown.
However, it is clear by now the markets are not just looking for stimulus measures, monetary and fiscal, to relieve the pressure on risk assets. Although each have the capacity to spur sentiment higher and drive short-term relief, the more pressing matter is the healthcare response and the containment of the virus itself. This containment will eventually happen whether by vaccination or flattening of the infection curve and increased immunity, but the timing is unknown, and the global economy will recover – the only thing growing as quickly as the virus case count is the size of the rescue packages, both fiscal and monetary. For more our Christopher Dembik has the G7 stimulus tally.
Markets initially took comfort in the Feds measures but the positive momentum was quickly offset by frustration and disappointment as the Senate once more failed to pass the coronavirus rescue package. Although the partisan dispute persists for now, as the economic damage inflicted on the US economy mounts, this will change. Forcing politicians to work together and stem what is firstly a health crisis and second an economic shock.
Australia Consumer Confidence, as widely expected, plunged 27.8% from last week. Although a drop was anticipated, the survey highlights the level of angst that has set in amongst Australian consumers. All sub-indices came in well below average, falling below levels seen in the GFC to match readings last seen during the 1990-1991 recession. A major problem here is the hit to sentiment and therefore demand cannot easily be reversed by monetary or fiscal policy. Those stimulus measures remain necessary, but likely insufficient. Whilst consumers are fearful of the threat of a global pandemic confidence will be hard to restore, hence why containment and healthcare efforts are so important in supporting confidence.
As both NSW and Victoria have moved to shutdown non-essential services to contain the spread of COVID-19, unfortunately members of the workforce that span these services have lost their jobs. According to ABC, the Government is estimating at least 1 million people could be made unemployed as the economy slows and some businesses remain shutdown. And if the queues outside Centrelink offices are anything to go by, this is fast becoming a reality. This would correspond to an unemployment rate closer to 13%, although the figure would also be dependent upon the change (or not) to the participation rate.
Already restaurant booking data from OpenTable shows a 66% decline year on year in seated diners in Australia. Highlighting how much the services sector is already suffering as consumers limit discretionary spending and stay home whilst restaurants and cafes shut due to increasing public policy responses. For small businesses like restaurants, with high fixed costs like rent to pay this impact will be devastating. With many balance sheets not able to withstand the lockdown period which will inevitably see workers laid off. The food service and accommodation sector last year accounted for around 30% of the part time workforce. Aside from hospitality, other sectors that will be heavily impacted include retail, recreation services, real estate services and construction.
A key area of concern for Australia is the labour market given the level of household debt. Australia has a very high level of household debt relative to other OECD countries; with household leverage ratios at almost 2x incomes, therefore a spike in unemployment could prompt a far more serious economic fallout. That is why it is paramount for the government and the RBA to consider maintaining job security as focal point in their response measures, and why the calls for helicopter money and universal basic incomes grow louder.