Market Update – can we look longer term vs just the now?
Some comments from myself and what I am seeing, reading and in talking to others and jumbled in with commentary from funds managers we are talking to at present;
Volatility is at extreme levels, in many places more so than in 2008. This is as much a function of impaired liquidity as anything else. I saw a comment from a fund manager on Friday which rings very true – “markets stop panicking when policymakers start” … and that process has begun. Policymakers are ramping up big policy responses but, so far the communication has been painfully bad and there is no global co-ordination. Both need to improve before markets can stabilise and liquidity improve.”
Policymakers are now finally communicating a ‘whatever it takes’ narrative, providing more policy details and co-ordinating better. The essential first steps toward normalising financial market function are now happening. Some examples:
- US Federal Reserve cut its official cash rate to zero and announced $700m of bond purchases (i.e. QE). This is in addition to Friday’s announcement of up to $5 trillion of cumulative liquidity injections. They learned the lesson from 2008 … act aggressively and fast.
- On Friday, Germany announced up to EUR550bn of funds to be made available to for companies to survive the economic disruption. Germany’s finance minister said “This is the bazooka … We’re using it to do what is necessary. We’ll check later to see if we need additional smaller weapons.”
- Canada’s central bank and govt. held a joint press conference to simultaneously announce rate cuts and fiscal stimulus.
- The French President is calling for G-7 leaders’ summit today. Overnight they had a meeting in which it was agreed a whatever it take approach is required and fast. Markets were hoping got definitive’ s but too early for that. I would expect it to happen in a few days though.
- The US President Trump acted more presidential on Friday, announcing aggressive measures around targeted help to certain sectors and evidence of co-operation with democrats. THIS IS A GOOD THING.
- I was talking to clients yesterday and commented that I felt that it wouldn’t surprise me to see PM Morrison announce further measures following last weeks. I read overnight this is in the works
- I also hear that the RBA is close to announcing quantitative easing (QE).
In addition we have seen in the last 2 days;
“Australia’s securities regulator has issued directions to a number of large equity market participants, requiring them to limit the number of trades executed each day until further notice, it says in statement Monday. Directions require those firms to reduce their number of executed trades by up to 25% from the levels executed on Friday March 13. This action will require high-volume participants and their clients to actively manage their volumes”
– Bloomberg News, 16th March
This morning I read that on Friday UniSuper (an $85bn dollar super fund) has stopped lending its shares out to hedge funds and the like to combat short seller in the market (that is traders selling shares they don’t own in the hope of buying them back cheaper). I expect other large Industry Super Funds to announce the same measures.
The above 2 measures are designed to stop the large falls in markets. I would not be surprised if ASIC banned short selling in full for a period of time (they did this in 2008 and 2009).
Weekend and Monday headlines were dominated by more lockdowns in EU (Spain, France) + rising infection numbers in most places. However, in the midst of all the panic a nascent narrative is emerging of the worst being over in two of the earliest and hardest hit countries (China and South Korea). For example, on Saturday S. Korea reported more recoveries from the coronavirus than new infections on Saturday for the second day in a row as targeted containment based on large scale testing seems to be working. The same appears to be happening in China (with usual caveats on data reliability). If this continues, we’re getting a preview of a positive outlook once the peak of the epidemiological curve has passed.
A commend below from one of our fixed income managers;
Why is it relevant?
– The arrival of the policy cavalry means we’re now on the path to resuming normal market functioning and we can’t even begin to think about a sustained recovery in risk assets without this happening.
As we saw in 2008, interest rate markets need to stabilise and function properly before everything else can. This is because rate markets are the plumbing of the financial system, they are the risk-free benchmark from which everything else priced and they need to function properly before liquidity can return everywhere else.
– Due to impaired liquidity and market functioning, prices everywhere are no longer about fundamentals or valuation. They are being driven by forced risk reduction, margin calls, deleveraging etc. A direct result of this is a breakdown of conventional pricing relationships. For example, last week the MSCI World Index fell -12.5% and global govt. bonds fell -3.5% (Barclays Global Govt. Bond Index) ie bonds did not hedge equities.
To help the system function through this institutions like the RBA and US Fed as outlined above are pumping huge amounts into the financial system.
All of the above will work when markets feel the worst is close OR as I alluded to above, we see signs there is light at the end of the tunnel with what other countries have experienced.
Finally – I heard a very seasoned fund manager comment that the current share market is like you OWN a shop full or products (read shares) and at present you are willing to sell them for anything that anyone is prepared to offer. You know what you own is of high quality and that in less than 12 months you could probably sell them for 30% more but you simply don’t care. All rationale thought has gone. This is what investors are faced with at present.
I personally don’t know when the market will stop falling but I believe we are close to where the selling will stop as all the above actions by Central banks, Governments, Regulators etc…. once Covid_19 stops spreading or appears to be getting under control, we will be left with still low unemployment (it will rise but it should be short term), interest rates close to zero and measures in place to support the economy in getting back on its feet. These are the conditions that provide very solid equity market returns.
As always, please feel free to reach out if you have any questions.
I have attached a note from Shane Oliver. Again, it tries to put things in context and perspective as the mass media are doing a very good job of spreading rampant fear. On the drive into work this morning I heard Australia’s Chief Medical Officer repeat numerous times during an interview that 80% of us will be absolutely fine and are highly likely to experience no symptoms at all. The risk is the small percentage of the population it will affect and the serious consequences of that on them. The various measures being put in place are designed to limit the damage to this group of people and provide the medical system with the support it needs. Sounds all reasonable. The radio host thanks the Dr and then says “really scary stuff, the chief medical officer of Aust. says there are going to be some of us that won’t see this through!!!”