The week begins in Asia with a repeat heightened volatility and wild intraday trading ranges with a continuation of the themes that have dominated financial markets throughout the prior week.
Still governing price action on the one hand, investors are still struggling to price the downside recessionary impact of the COVID-19 outbreak as infections mount globally and shutdowns and containment measures to slow the spread become more aggressive. On the other, the growing fiscal stimulus plans and extraordinary amount of liquidity released by global central banks. The first central bank cab of the ranks this week has been the RBNZ who have announced a QE programme of $NZ30bn. This dilemma is aggravated by the rapidly changing information set. The news flow is thick and fast and it seems that for each stimulus package announced, a new travel restriction is enacted or city is locked down. Meaning that the size of fiscal packages needed to contain downside risks and cushion the blow to the economy also grows. The current policy response has stepped up in the past week, but are likely still not comprehensive enough to mitigate the deterioration in the global economy.
A key problem being for many including policymakers, we are flying blind, particularly as there is little real-time data available. The dispersion in analyst and economists’ forecasts for the hit to EPS growth and GDP highlight the level of uncertainty that prevails. Even the virology experts and epidemiologists are unsure how quickly the enacted containment measures will work. This makes the task of estimating the depth and duration of the hit to economic growth and earnings near on impossible at this stage, adding to the angst in financial markets as participants struggle to price risk.
For confidence to return, the onus will be on reduced COVID-19 transmission rates, increased immunity and a clear containment of the outbreak. In other words, a flattened infection rate curve, with reduced risk of reinfections catalysing another round of shutdowns.
Asian markets are suffering broad-based declines after US futures hit limit down within minutes this morning. At time of writing the Nikkei +1.93%, Shanghai -2.89%, KOSPI -5.6%, Hang Seng -4.32%, ASX200 -5.62%, NZX50 -7.59%. Sentiment dampened as unfortunately, COVID-19 cases grew globally over the weekend, and lockdowns/containment measures widened. Both New Zealand and two states in Australia have now enacted shutdowns of non-essential businesses. Italy will shut down most industrial production for the next 15 days, European lockdowns are being extended and the state of Illinois have also issued a state wide “stay at home” order.
Another contributor to risk asset pressure today comes as democrats stalled the first procedural vote needed to advance the coronavirus rescue package. The US Senate failed to agree on the economic stimulus bill, with disagreements centred on how to spend the $2trn. The vote is now rescheduled for Monday, with US futures in the red for the Asian session perhaps some may reconsider.
On the ASX 200 the financials and real estate sectors were the hardest hit and the ASX 200 Banks Index closed at levels not seen since 2009. This as investors price the incoming hit to earnings. The recent rate cuts from the RBA will pressure net interest margins and the impending certainty of a recession in Australia sees risks of credit losses rising. Many businesses in Australia has never had to grapple with a recession, let alone the unprecedented nature of the present health crisis which has completely shut down parts of the economy. The dent to economic activity will also see reduced business conditions and therefore credit worthy loan demand. However, for the Australian banks the biggest risk looming on the horizon is the property market. Household debt to income ratios across the nation are well above OECD averages, at approximately 2x household income. This debt is serviceable whilst unemployment is low. But as Australia’s unprecedented streak of economic growth fizzles out, a rise in unemployment could be the catalyst for halting the nascent recovery in the housing market. This scenario would see a larger hit to bank earnings and increased credit losses, and a continued de-rating of bank share prices. Over the weekend, the preliminary auction clearance rate slumped, likely as social distancing measures and falling consumer confidence has property buyers on the sidelines. If this trend continues, this would point to a downturn in house prices ahead.