After the ructions in markets over the past few months, the past four weeks remained more volatile than the past few years, but markets largely moved sideways. The S&P/ASX 200 is lower by 1.5% over the past month at the time of writing, about 20% down from the start of the year, but up nearly 20% from the recent March 23 trough.
The S&P 500 in the U.S. is slightly negative over the past month and is down just over 10% year to date. It is up almost 30% from the recent trough. The rebound and outperformance of the U.S. markets have primarily been driven by a much higher weighting towards technology and internet related businesses, with the Nasdaq 100 actually providing a positive return year to date.
On the other end of the spectrum, the Euro STOXX 50 is one of the worst performers, with a heavy weighting in financials and industrials. It is down over 25% year to date, and only 16% above it’s recent bottom.
Meanwhile, China’s CSI 300 performance continues to show little correlation to developed markets, rising nearly 2% over the past month. It is down less than 5% for the year and has been far less volatile this year, falling less than 15% for the year at its lows.
Commodity markets have seen huge volatility in the past month as oil prices went negative for the first time ever in history. Oil has since recovered and is now trading nearly 50% higher than it was four weeks ago, with the U.S. West Texas Intermediate Crude price close to U.S. $30 per barrel as markets look forward to global economies re-opening and global oil producers agreed to cut output. Industrial metals like copper remain largely flat, showing some continued skepticism for a fast recovery as gold continued to march higher, up over 3% over the past four weeks to U.S. $1,756 per ounce.
Bonds were mixed for the month as Australian yields rose, with the 10-year 0.07% higher at 0.92% yield. U.S. bond yields were largely flat over the month, while most European and Asian countries saw lower bond yields. Corporate credit also edged lower as default worries remain amid large swathes of downgrades from ratings agencies.
The Australian Dollar rose slightly and is trading around 64 U.S. cents.
Economic data is starting to indicate the severity of the sharp fall from lockdowns globally. Meanwhile, there are escalating tensions between the U.S. and China as both seek to deflect from their slow response and poor containment of the pandemic. The U.S. elections may have fallen out of headlines in recent times, but will likely come back to the fore as we edge closer to the vote.
Australia’s retail sales figures for March indicates the extent of stockpiling as it notched an 8.5% rise over February, but will likely be weak in the coming months as stockpiling subsides and some restrictions remain in place. The unemployment rate ticked up by 1% to 6.2% but the headline masks a bigger fall as the participation rate dropped with people giving up on looking for a job. Employment fell by 594,300, worse than the consensus expectations for 575,000 job losses. Of the job losses, 220,500 were full-time employees.
Economic data was dismal for U.S. and Europe as expected, with European sales and industrial production figures dropping more than 11%, whilst they were down more than 15% for the U.S.. Chinese data could provide some insight as to what will be expected as U.S. and Europe re-opens. Encouragingly, Chinese exports unexpectedly rose whilst industrial production rebounded. On the other hand, unemployment ticked higher and services remain weak, indicating that the recovery has been uneven.
Whilst economic data coming through will likely remain weak for most countries, markets continue to look forward and are ignoring worse than expected readings for March and April. June and July readings will likely be of more interest as the market gauges the pace and magnitude of the recovery as lockdowns wind down, though the risk of a second wave looms large.
Australia has so far managed the outbreak better than most, with new cases over the past month measured in the tens rather than in the hundreds or thousands. However, given that services make up the bulk of Australia’s economy, the lockdown has had a severe impact with high frequency data indicating a nearly 50% fall in economic activity as per the chart below.
Source: AMP Capital, Bloomberg
Bar an economic miracle, Australia will put an end to the longest period of economic expansion on record. On the bright side, activity looks to be recovering slightly and will likely bounce as restrictions are eased. The question on the market’s mind is how fast will the recovery be and by how much.
Using China as an indicator given that it has eased restrictions in March, we can see in the chart below that manufacturing bounced back fairly quickly but retail sales, a proxy for services, remained weak, close to 20% below pre-lockdown levels.
Source: NBS, UBS Asset Management
If Australia follows a similar path, it is likely that the domestic economy will not recover quickly given that the service sector makes up nearly 70% of the economy. There is hope for a less severe hit to services as restrictions have been less stringent and the outbreak has been more controlled, thus leaving less damage on the consumer psyche.
Another source of hope is the strength of the government’s balance sheet. Though the Australian consumer is well-known to have one of the highest levels of indebtedness globally, higher than the U.S. at the depths of the financial crisis, the Australian government has one of the lowest net public debt balances in the developed world. This leaves much room for government spending to aid Australians in their time of need, with spending measures announced thus far expected to bring debt levels up to 40% from just over 20% as per the chart below. This remains well below most developed country peers even pre-COVID-19.
Source: AMP Capital, IMF
Australia has already announced stimulus measures of close to 15% of one year’s Gross Domestic Product (GDP) as per the chart below. Many other countries have also announced support measures, with Italy and Germany providing support of more than a whopping 30% of GDP. However, unlike most other countries with weaker balance sheets and less flexibility in their budgets, most of Australia’s stimulus will be in the form of direct a direct fiscal impulse, rather than via loans or guarantees. As a proportion of GDP, Australia’s fiscal stimulus exceeds other major countries. This should have a more direct impact on growth as loans and guarantees would leave businesses burdened with higher debt levels, and may have a smaller impact on the all-important consumer if savings rates need to rise to reduce the debt burden.
Source: AMP Capital, IMF
Australia’s economy will take time to recover and a vaccine may be required for a return to ‘normal’, and with services making up a large proportion of GDP, the damage will be severe. However, the strength of the government’s balance sheet puts Australia well-placed to cushion the blow and position for a recovery.
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