Overnight: Fiscal Failure

By Greg Peel

Polly Follies

Morrison and Frydenberg’s biggest problem with delivering a fiscal stimulus package is not the loss of face on previously stubborn insistence of a surplus, but the ten plus years the Coalition has heavily criticised the Labor government for handing out $900 cash payments to lower income Australians in 2009, leading, in part, to a decade of deficit.

Yesterday the government announced $750 payments to welfare recipients and others as part of its $17.6bn package and attempted to spin this as different. Morrison has been heavily criticised for his address to the nation, for grinning, for talking as if to children, and for putting a “marketing spin” on the whole deal. But financial markets care not for politicking, until it gets in the way. At least in Australia the rule at such times is the Opposition comes on board.

As to whether the market was ever going to consider the package as the right one we’ll never know. Donald Trump’s announcement of the closure of US borders to Europe, during our trading day, swamped all. Trump blamed Europe for importing a “foreign” disease, and announced no people or cargoes would be let into the US. As the US overnight stock futures markets went into apoplexy, Trump was forced to quickly qualify that only people, not cargoes, would be barred.

Even though he had been reading from an autocue.

Not that the qualification made much difference. US stock futures plummeted anyway, and thus so did the ASX200.

But it was not just the European ban that had Wall Street yet again crashing. News that Congress was yet to agree on a fiscal stimulus package led to anger, frustration, and more selling. Trump’s initial pledge of fiscal stimulus days ago sent Wall Street bouncing hard. Since then nothing’s happened, so all that has been given up, and more.

Last night the Dow fell -10% as US indices closed on their lows.

Not helping was news actor Tom Hanks, acclaimed star of Bachelor Party, has the virus and is in quarantine on the Gold Coast. That makes it personal. Canadian prime minister Justin Trudeau is in self-isolation. The Chicago Mercantile Exchange has shut its trading floor (electronic trading continues). The US national basketball season has already been abandoned and the start to the baseball season has been postponed. Around the US, state governments are banning gatherings of more than 500 people.

They tried hard, but the Australian Grand Prix has finally been cancelled, with team members being diagnosed. Maclaren had already pulled out anyway. Miley’s not coming so the Bushfire Appeal concert is off, and probably would have been cancelled anyway. The NRL season kicked off last night, but one feels it’s only a matter of time.

There was little discrimination among sectors on the ASX yesterday, other than to note staples and utilities only fell -5% when everything else fell -7-8%. Only two ASX200 stocks closed in the green – Cimic Group ((CIM)) and Pro Medicus ((PME)). Among the biggest losers were understandably Flight Centre ((FLT)) and Webjet ((WEB)), down -18% and -17% respectively, despite having both fallen a long way already and both being heavily shorted, Webjet in particular.

There’s no end in sight – the futures are down -383 points this morning.

The only Sherriff in town

As Wall Street was plummeting last night, that which everyone had been fearing began to materialise. Bid/offer spreads on short term credit widened, threatening a credit freeze. The Fed thus jumped in and injected limitless liquidity. That’s right – however much you want for as long as it takes.

Under Fed rules, such as decision need only be made by the chairman, without an FOMC vote.

The news resulted in a 6% intraday bounce for the S&P500. Once upon a time investors would have been happy with 6% in a year. But it all came to nought as the selling began again. The Dow had been down -2000, and was quickly back down -2000 once more. It hung at that level for most of the afternoon but then the sell-on-close orders hit to produce a -2352 point close, or -10%.

Is there a light at the end of this tunnel? Yesterday China reported only 15 new virus cases. Beijing has been highlighting the slowing pace of Chinese infections for several days now, it’s just that no one’s prepared to fully believe them. However, news from trusted sources is China is quickly getting back to work, and factories are back in operation.

The only risk is China has also reported “imported” virus cases, that is people travelling into China from abroad. If restrictions are lifted too quickly, it could all kick off again.

South Korea has also shown the world how to deal with the situation, with rapid testing and sufficient test kits – something the US is well behind on.

Alas Italy is finding it hard to cope. But if Italy can slow it down, there may be a glimmer.

Commodities

The gold price has taken a tumble, which could be put down to more margin calls on equity positions and/or the Fed opening its safe.

Iron ore looks lonely.

Trump’s Europe ban has oil prices down once more, more so Brent than WTI under the circumstances, such that the gap between the two is now minimal.

A gain of 0.7% for the greenback is not enough to explain a collapse in the Aussie, down -3.4% to US$0.6265. The government is finally blowing off a surplus, and the RBA is expected to act again. The Aussie’s now in GFC low territory, heading for Banana Republic (1986: US$0.5710).

Today

The SPI Overnight closed down -383 points or -7.3%. There’s something about -7.3%.

Nothing much else matters.

Well actually, it’s Friday the Thirteenth.

The Australian share market over the past thirty days…