Overnight: As The World Shuts Down

By Greg Peel

Not There Yet

The bad news is the ASX200 fell -9.7% yesterday and the futures are down another -4.1% this morning. The good news is the ASX200 yesterday fell to the magic number of 5000, still 121 points above Friday’s low. If the futures are accurate (-201) we’ll hit a new low today. Whether that will be an intraday low or closing low remains to be seen, and could prove critical.

It is also worth noting that the index fell -400 points from the open but held around -300 for most of the session – low volatility – before a typical market-on-close selling spree.

Yesterday’s was the largest one-day percentage fall since 1987. Last night Wall Street also saw its worst session since 1987. We might at least draw some comfort from the fact we are not fully double-counting this morning, as the S&P500 fell -12%.

In 1987 Wall Street fell -25%. This can no longer happen, given 15 minute circuit breakers at -7% and -13% and a close of markets for the day at -20%. The ASX has no such thresholds, rather the discretion to shut the market if it is deemed disorderly.

The trigger for the worst sessions so far was the Fed’s -100 point rate cut to zero and reintroduction of QE, making -150 points of emergency cut plus extraordinary measures even before this week’s scheduled policy meeting. In 2009, the Fed’s introduction of QE, with rates already at zero, ended the GFC. This time, the sheer size of the response – bigger than any individual move during the GFC – clearly spooked markets. Rate cuts typically drive rallies, but not this time.

This time the enemy remains a largely unknown force. The ’87 crash was nothing more than a blow-off in a market that had gone parabolic, as was the case in ’29. The 2000 tech wreck was a similar situation. The GFC was a financial crisis that threatened to freeze global financial markets, that was ultimately dealt with financially, but took almost two years. The virus is a different matter.

One by one countries are locking down, and within countries, everything from schools to bars are shutting down. It seems inevitable that in Australia, our schools will be next. It also now seems inevitable Australia, and the world, will endure a recession, but at this stage likely only those two quarters that technically define one, using China’s experience as a guide.

Incidentally, China reported a -13.5% contraction in industrial production in January-February from a year ago, a -20.5% fall in retail sales and a -24.5% fall in fixed asset investment. The numbers are hardly surprising.

With Morrison’s first stimulus package yet to actually progress through parliament, a second has been announced. The RBA “stands ready to purchase Australian government bonds in the secondary market [QE] to support the smooth functioning of that market, which is a key pricing benchmark for the Australian financial system”. ASIC has restricted volumes institutions and other large volume traders can sell on the stock market.

The question from here is as to whether a recession, which seems the end-point at this stage, is priced in. We all know what’s going on, so fear must eventually exhaust itself.

While all sectors fell on the ASX yesterday, energy, financials, industrials, discretionary and IT all fell over -10%. Even healthcare and utilities got close. But some sanity did prevail.

Telcos fell only -3.0%, because we’ll all be needing to communicate solely by phone and we’ll need Foxtel to watch sport and otherwise entertain us in our isolation. Telstra rose 1.8%. Yes, rose. Other index stocks to rise on the day were Fisher & Paykal Healthcare ((FPH)), up 4.2%, given it produces equipment doctors need right now, and Domino’s Pizza ((DMP)), up 0.2%.

Just leave it outside the door thanks mate.

Staples fell only -3.6%. Further high level investigative reporting from this writer yesterday revealed that aside from toilet paper, rise and pasta, shelves were also empty for eggs, mince meat, chicken, and one variety of potato. Non-perishable food shelves were near empty.

Materials only fell -7.7% because iron ore will be needed to make the steel Beijing will deploy in its fiscal stimulus.

The list of ASX200 losers was no surprise: Star Entertainment ((SGR)), Webjet ((WEB)), Collins Foods (CKF)), which owns the KFC franchise, G8 Education ((GEM)) and Aristocrat Leisure ((ALL)) all fell over -20%, as did other stocks that did not make the top five.

Do Your Bit

All major US banks collectively agreed last night to cease share their buybacks. This will help to underpin balance sheet strength and not make them look like opportunists at this time. Unfortunately it doesn’t do much for their share prices. JPMorgan, for example, fell -15%.

The S&P500 opened limit down from the open (-7%) and thus closed for 15 minutes. The S&P then tracked a similar path to the close as the ASX200 – steady until the bitter end.

Aside from the -100 point rate cut and US$700bn of QE announced on Sunday, the Fed also injected another US$500bn into short term credit markets last night. The next step is supporting commercial paper markets, which are suffering the most.

Congress has still not passed a fiscal stimulus bill, but then the size and scope of that bill keeps growing. Trump has made all sorts of promises, from income support for casual workers to “back-stopping” the airlines to avoid inevitable bankruptcy. One presumes these measures actually will occur eventually. Meanwhile, the focus is on keeping Americans apart. Everyone is expected to do their bit.

Wall Street is pricing in the chance of a US recession at 67%, up from 41% in January when the penny began to drop on just how serious this virus is. Consensus GDP forecasts now have a small rise in the March quarter, a fall in June, flat in September and bouncing back in December.

But these are just forecasts. For now, keep calm and carry on.

Commodities

It’s getting more volatile, but still mixed, on metal markets.

Gold selling continues, despite massive monetary policy moves. “Sell anything” remains in play, and silver is now a major victim.

No surprises in oil. I hope Russia and Saudi Arabia are pleased with themselves.

A -0.7% fall in the greenback could not support the Aussie, down -0.6% at US$0.6110.

Today

The SPI Overnight closed down -209 points or -4.1%.

Today’s economic releases are largely meaningless. The RBA will publish its March meeting fish wrapper.

The Australian share market over the past thirty days…