SUMMARY
The US markets were up in July by 5.5% while domestic shares were up around 0.5% on average. The US economy has not significantly improved and there is little leading markets higher other than the substantial actions taken by the Fed in terms of monetary policy and the fiscal measures implemented by government. There is, perhaps optimism by some that a safe and viable vaccine may be found earlier than expected (for instance in Russia, where the safety measures required in the West were bypassed as they inoculated people in scale). Meanwhile however, in China, GDP has rebounded slightly and they have avoided a technical recession. China infrastructure and industry has increased which has boosted iron ore prices and will benefit our domestic resources sector. Despite the above, there remains a reasonable amount of risk and uncertainty in the markets. For example, the VIX (sometimes referred to as “the fear indicator”) remains high at around 22 which is still somewhat above the 12 to 15 range it has averaged in the several years before the pandemic.
ECONOMIC DRIVERS
In the US: Rates held steady, minimal improvement in economic conditions.
- Once again, at their most recent meeting (on the 30th of July), the Federal Reserve elected to leave rates unchanged at 0.25%. This was expected given that recent changes to the state of the economy were minimal. Fed Chair Jerome Powell indicated that forward guidance may be given in the September meeting later this year. This, along with the track record of the Fed during the pandemic thus far is supportive to the markets. Also, as previously reported, the Fed indicated that it doesn’t expect to increase rates through 2022. To-date, negative rates have not been entertained as likely for the US, however, yield curve targeting has been discussed.
- The most recent jobless claims report was slightly better than analyst expectations and is the first time it has been recorded as less than one million since the 21st of March. This follows the more significant non-farm payrolls report which reflects that there are still 31 million people unemployed and not looking for work.
- Market volatility has been trending downward since the recent mid-March spike where it went above 80. It is now at fresh lows since then at 22. 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: GDP rebound, avoiding recession.
- China GDP improved 3.2% in the second quarter, while no other major economy has shown recovery in growth to-date. This surprised economist forecasts and was accompanied by other good indicators. For instance, PMI continues to be above 50 with non-manufacturing PMI at 54.4, China currently has relatively positive outlook with regard to slow recovery. Spending on infrastructure, manufacturing, construction and raw materials is showing signs of recovery also.
- 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: Rates held, more employed
- The most recent rate announcement from the RBA on the 4th of August held rates steady 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.