Prospect of Coordinated Central Bank Easing Lifts Markets

Equities 4 minutes to read

Eleanor Creagh

Australian Market Strategist

Summary:  After a torrid week across global equity indices, which saw the fastest S&P 500 correction on record, the new week has begun on a more positive footing.


As COVID-19 infections in Italy, Spain, South Korea and Iran surged over the weekend, US case count suggests several community outbreaks and a weekend data release from China indicated contractionary activity levels - China’s official PMI plunged to a record low 35.7 – Asia trade was set for an ugly open. China’s worse than expected PMI decline will keep pressure on authorities to maintain liquidity and policy rate cuts this month. More accommodation will be needed, particularly for exporters as the global disruptions from the COVID-19 outbreak escalate. We expect ongoing RRR cuts and another 10bps MLF cuts, with ongoing fiscal support including subsidies for those industries most affected.

The worst China manufacturing PMI in history delivered a seas of red on the open, Aussie stocks fell more than 3% at one point, S&P 500 E-Minis slumped 2.1% and Aussie and Kiwi government bond yields hit fresh record lows.

However, as the rest of Asia came online the prospect of incoming coordinated easing from central bankers globally was mulled and a sharp turnaround came through. The Bank of Japan kickstarted the stimulus led rally, vowing ‘appropriate market operations’ to maintain stability and ample liquidity. The expectation that the Fed, the ECB, and even the notoriously reluctant RBA will join this party is helping to buoy risk assets further. The Fed statement from chairman Powell released Friday night only adds fuel to this fire. As we detailed previously, although monetary policy will not be an effective cure for a pandemic virus outbreak and the subsequent supply shock, the Fed will be forced to move in order to backstop confidence and ease financial conditions as the neutral rate of interest or r* falls meaning policy is too restrictive in real time.

After 6 days of heavy selling across global equity markets, the door is open for a relief rally and for markets addicted to easy monetary policy, the expectation of coordinated global interest rate cuts and liquidity provisions is as good an excuse as any. Even falling markets witness fierce upside rallies as shorts are squeezed and illiquidity drives larger trading ranges. Tactically this seems like the right play, but post any ensuing relief rally, the validity of any bounce remains a moving target. Particularly whilst a new information set is delivered every 24 hours, the jury is still out on whether the COVID-19 outbreak will be contained in the US and Europe. Following any relief rally, it is entirely possible (and likely) markets experience another wake up call as the realities of fractured supply chains, production bottlenecks and weak demand across multiple industries, continents and consumer groups, bites. We can no longer dismiss the implications of the virus outbreak to just tourism and trade and China supply chains. The global spread of COVID-19 is in its infancy so the ultimate impact is unquantifiable at this stage. For any forecaster or analyst to reach to any sort of conclusion, a lot of assumptions have to made, meaning a wide range of variability should be embedded into any anticipated outcome.

The VIX remains above 40, another reason to be wary of any bounce and a short term negative for equities. Whilst the present volatility regime remains in play, alarm bells are still sounding.

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.