SUMMARY
After a couple of consecutive strong months, the US stock market relented in September, retreating 3.9% for the month. Similarly, domestic shares were down on average around 3.6% for the month. The sell-off was driven by a pickup in Covid-19 numbers as well as, uncertainty around the outcome of the upcoming US Presidential Election (3rd of November), a lack of clarity and likely delay of additional Fiscal support. Following the end of the month Trump tested positive for Covid-19 and a narrative of stronger fiscal response from the Democratic party began to emerge. US Stocks have buoyed slightly since. The market, betting odds and polls have since seem to favour Biden over Trump (however mileage has varied with these indicators for example in the 2016 Election and with Brexit). In the meantime, the Fed and other central banks continue to provide support through extensive policy measures and near zero rates.
ECONOMIC DRIVERS
In the US: More forward guidance from the Fed, Election and fiscal uncertainty
- The Fed committed to an extension of forward guidance with respect to near zero to negative real rates at their meeting on the 17th of September. Subsequently, the meeting minutes showed that Reserve officials were concerned there might be a lack of continued fiscal support and would commit to low rates until inflation averaged at least over 2%. In the meantime, improvement to economic conditions has been slight to meagre. As previously reported, 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) spiked from the August low of around 22 to climb above 33 in September as the market turned negative for the following couple of weeks. Volatility has since declined to around 25 and, relative to historical levels, this is still high and indicates that there is risk and uncertainty in the markets
- There is currently uncertainty around the upcoming Presidential Election, as well as whether or not there will be additional fiscal stimulus. Furthermore, 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: more possible evidence of slow recovery
- The manufacturing and services industry in China showed some additional signs of recovery in September with the PMI and non-manufacturing PMI being 51.5 and 55.9 respectively. Export orders also rose within the manufacturing PMI above 50 for the first time since last December. This continues the recent trend of slight recovery in China, as previously reported, China GDP improved 3.2% in the second quarter
- 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 on hold and targets unchanged for the RBA
- At the most recent RBA meeting on the 6th of October the RBA held interest rates steady at 0.25%. As previously reported, 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. The RBA 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.