SUMMARY
On average the largest US companies in the world gained a little over 7% for the month of August. There was some optimism regarding COVID-19 vaccine viability, however, the realities are that we have no known way of speeding up the safety testing process. There are still thirty million or more unemployed people (most newly so) in the US, many of whom have no foreseeable schedule of when they might return to work. Also remarkable is that the markets closed at an all-time high and continued to rise at the start of September until the much overheated tech sector began to capitulate. The VIX (a.k.a. the fear index) has since hit its highest level (33) since mid-March (80). The vast stimulus measures, both fiscal and monetary have been key drivers for the stock market heading higher. In China a moderate recovery seems to be underway from the data being released, with construction, exports and retail sales looking slightly healthier. Meanwhile, our local share market, on average was just slightly higher, despite the country falling into a technical recession for the first time in 28 years.ECONOMIC DRIVERS
In the US: Little change to the economy or to the prevailing COVID-19 situation
- The Fed left rates on hold through the month of August as expected at 0.25% and it is anticipated that they will remain there until at least the next meeting on the 17th of September. It is hoped that stimulative forward guidance might be offered at said meeting. As yet no significant improvement to economic conditions have been observed or is expected in the near term. For example, despite a handful of positive jobless claims reports, unemployment has not significantly improved, nor is it expected to in the coming month until material changes occur with regard to Covid-19. There are still over 30 million people unemployed and not looking for work.
- The market volatility index (VIX) hit its lowest point in August (near 21) since the recent mid-March spike where it went above 80. It since climbed to above 33 as there was some capitulation in overheated tech stocks. Relative to historical levels this is still reasonably high and indicates that there is risk and uncertainty in the markets.
- Further to the above, as previously reported: a staggering amount of support has been deployed by the Fed, which includes aggressive emergency cuts to rates in March as well as a slew of additional policy measures, with similar action being taken around the world in developed economies in response to COVID-19. Following regulation changes the Fed has also launched Money Market Mutual Fund Liquidity Facility (MMLF) and MLF, The Pay check Protection Program Lending Facility (PPPLF), the Commercial Paper Funding Facility (CPFF), the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF), the latter of which is a major step toward avoiding a financial contagion that spreads to the corporate bond markets.
- Regarding recent fiscal measures: Trump signed four executive orders (10th of August) that access FEMA funds to provide emergency funds for the unemployed, to defer tax payments for those earning less than 100K and to provide assistance to home owners and renters. On the 5th of June several changes to the Paycheck Protection Program (PPP) Act came into law, which has had the effect of easing payroll demands and gives loan forgiveness further than previously set out in April. As previously reported “Phase 3.5” of COVID related fiscal stimulus was enacted on the 24th of April to direct 484B toward funding hospitals and COVID-19 testing. Also as previously reported: a “Phase One” 8.3B spending bill was passed on the 6th of March, which included funding for vaccine research, and assigned money to state and local governments. On the 13th of March, Trump declared a “state of emergency” to free up 50B in spending. On the 18th of March “Phase Two” took the form of a stimulus bill that included free virus testing, expanded unemployment benefits and healthcare funding. “Phase Three” also known as the “CARES Act” was passed on the 25th of March, which include 2 trillion in spending and included 300B in direct payments to earners under 75K p.a., 500B in government lending to companies impacted by the crisis, 367B in small business loans, 250B in unemployment insurance, 220B in tax cuts as well as a smaller amounts to support state governments and healthcare.
In China: evidence of mild recovery continues
- Year on year industrial production grew at a rate of 5.6% since this time last year. Exports and the construction sector have shown improvements. Furthermore, retail sales increased by 0.5%, the first such positive growth this year. This continues the recent trend of slight recovery in China, as previously reported, China GDP improved 3.2% in the second quarter, while no other major economy has shown recovery in growth to-date.
- Also as previously reported: In May, China announced fiscal stimulus, which was significant at US $500B (3.6T Yuan), but still less than many other countries hit by COVID. Furthermore, the issue of 1T Yuan worth of special treasury bonds was announced (a measure not seen since 2007). The special bond quote for infrastructure was also increased from 1.6T to 3.75T yuan.
- According to the IMF, further to the above, around US 360B in fiscal support measures have been announced in China which is to include social security tax relief, increased unemployment payments, production of medical equipment and to increase spending related to controlling COVID-19.
- As previously reported, the Peoples Bank of China (PBOC) reduced bank reserve requirement further following its action in March (freeing 79B). Also, to-date, as reported previously, the PBOC deployed 174B in reverse repo operations on February 3 (i.e. very short-term loans to banks so they remain stable and able to meet cash requirements. This was followed by an additional 71B on February 4. They also cut their medium term rates by 0.1% on the 16th of Feb.
In Australia: Technical recession, first in 28 years
- Australia officially recorded its first recession in 28 years at the start of September, while quarterly GDP came in lower than economist estimates (est. -6% actual -7%) for the June quarter. A resurgence of COVID-19 cases in Victoria and NSW made a new peak at the start of august before trailing off since.
- On the 1st of September, the RBA held again rates steady at 0.25% where they have been since the 19th of March following a series of cuts. Unemployment figures were better than expected with the official headline number being 7.5%. As previously reported the RBA has scaled back bond purchases (to-date around 50B) but are still supporting credit markets and expended the eligible collateral to investment grade securities. Also as mentioned previously: the RBA cut rates twice in March, first on the 3rd of March by 25bps down to 0.5 percent (after having left rates unchanged at 0.75% at the previous meeting). The on the 19th of March the RBA cut by another 25bps to their current level at 0.25%. The RBA also committed to “market operations” i.e. the purchase of government bonds in the secondary market as well as additional repo operations.
- As previously reported, to-date, the fiscal response from the government targeted businesses and the newly unemployed. There are three stimulus packages to-date as well as 11.8B total in state-level packages. The first, a 17.6B package (12th of March) that includes cash payments of $750 to welfare recipients as well as tax breaks for small businesses. The business incentives include cash payments of between 2,000 and 25,000 to support hiring staff and paying wages. Further to this, 2.4B will be spent on health needs, including coronavirus clinics and other related expense needs as well as 1B to support the tourism sector. The second package on the 22nd of March, was for 66B to include income support for workers (“JobSeeker payments”) and small business loans. The third stimulus package on the 30th of March of 130B to include $1,500 fortnightly payments to employers to pass on to employees to keep them in work.
- Further to the above, an additional phase of cash payments to low income households was announced in early July, which will deliver $750 cash to around 5 million Australians, which will total around 3.8 billion.