Fiscal and Monetary Stimulus Buoys Investor Hopes

Friday 27th March 2020

Fiscal and Monetary Stimulus Buoys Investor Hopes

Friday 27th March 2020
Written by Chris Lioutas

Markets –

  • Local and global equity markets finished higher for the week, at time of writing, with sentiment boosted by significant central bank and government stimulus.
  • Both local and global companies began to raise capital this week via equity raisings in order to plug holes in their short term working capital and cash flow needs in order to get them through the next 3-5 months.
  • Qantas share price rose after securing $1.05 billion of funding against its aircraft fleet at an interest rate of 2.75% to give the airline some added liquidity.
  • Dominos was forced to shut its New Zealand stores after the NZ Prime Minister announced a full shutdown of the country.
  • Debt markets also began to recover this week as significant central bank buying added much needed liquidity to a market that was effectively broken a week ago.
  • The Aussie dollar rose this week, pushing through the 60c mark, largely the result of the US dollar falling. The US dollar fell as concerns arose regarding the spread of the virus.
  • The oil price rose slightly over the week buoyed by news that the Chinese economy is recovering.

Economic – 

  • The Reserve Bank of Australia injected almost $7 billion into the financial system on Tuesday and pushed nearly $65 billion cash into the financial system since March 12. A good start, but plenty more to come.
  • Retailers across the country closed their doors and stood down tens of thousands of staff as they attempt to fight off solvency.
  • Westpac has revised its forecast for the unemployment rate to surge to 11.1% in the June quarter, up from their previous estimate of 7%. They also have the economy contracting by 3.5% in that period.
  • The US saw a spike in unemployment claims last week with 3 million people filing, up from 200,000 the week before. The number is likely to be well north of 3 million.
  • Singapore, which is particularly sensitive to global trade, announced a preliminary economic growth estimate of minus 10.6% for the quarter and minus 2.2% over the year, which is worse than they experienced in the GFC.

Politics – 

  • The US Senate finally approved an enormous US$2 trillion fiscal stimulus package to help soften the economic blow that’s coming. The package includes US$1,200 for each adult and US$500 for each child. The overall package is a good start, but more will be required, possibly double the US$2 trillion.
  • US President Trump boldly tweeted that “we cannot let the cure be worse than the problem itself”, indicating that some sort of decision will need to be made at the end of the next 2 weeks as to whether lockdown is the right solution. He somewhat softened that stance later in the week.
  • PM Scott Morrison announced a delay to the handing down of the federal budget to later this year, whilst providing more detail on the government’s second round stimulus of $66 billion, which is focused on small and medium sized businesses. The total stimulus now sits at $189 billion, which is well south of what’s required.

Ex-European central bank governor Mario Draghi, still a hugely influential figure, mentioned that a significant increase in government debt will become a permanent feature of our economies and will be accompanied by private debt cancellation.

Chris Lioutas, Director
Insight Investment Consultants

Chris is an independent consultant and is a member of Maxim Private Clients Pty Ltd Investment Committee.

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