Key events of the week: Optimism prevails for now
- Led by the US, global equities shrugged off economic concerns and instead focused on the potential peak in US infection rates and the first signs of a tapering off in key European epicentres (Italy) over the past week. As at Wednesday, US equities had risen over 10% for the week and are now up a staggering 28% from the low hit on March 23rd. On the negative side, performance was not uniform across regions, markets or sectors. Asia was a laggard as Hong Kong and Singapore reintroduced social distancing measures while China was also relatively flat despite finally removing restrictions in Hubei - 76 days after lock-down began. Both Europe and the UK were hampered by poor performance from the banking sector as the regulators enforced the suspension of dividends.
- At a sector and stock level, the bullish narrative favoured the most heavily shorted and worst performing areas with REIT's, Financials and Consumer Discretionary sectors leading the rebound at a global level. Consumer Staples, Utilities and Healthcare were all underperformers - in-line with their relative stability and outperformance in the prior weeks. Oil has been better behaved and managed to hold onto the substantial gains of the prior week following news that a production cut by KSA and Russian could come before the end of the week. Bond yields followed risk assets higher over the week with the curve steepening as a result. US 10 year yields were up by 18bps during the first few days of the week.
- The Australian equity market was up 6.3% over a shortened week, which was relatively disappointing compared with the lead offered by global markets and cyclical sectors. The trend throughout the week was one where the market opened strong, only to give back the gains as Asian markets opened. A large sell-off in the banks as the risk of dividend cuts and/or suspensions became more widely feared did not help a market that continues to struggle for consistent leadership (it's coming from either resources or banks). On the positive side, the rush to raise capital has continued with around $7bn (at an average 28% discount) now raised since the sell-off began. We think there is substantially more to come (in the GFC capital raisings amounted to $100bn) but at this stage the market is, for the most part, rewarding those who are in the first tranche of capital raisings. As the current downturn is not a balance sheet recession but an earnings recession, there does not appear to be much concern about shoring up balance sheets for good quality companies or weaker companies for the right discount. The Australian Government pushed its JobKeeper proposal through Parliament which now removes concerns around any possible delays. Long bond yields followed US yields higher with the 10 year rising just under 20bps to 0.91%. Compared with the prior two weeks where the A$ rose from a low of US$0.57 to US$0.62, the currency traded relatively flat but is holding onto levels in the low US$0.62 range.
Key events of the week:
Policy changes this week: No Significant policy implemented but Japan's massive stimulus is coming and the US is negotiating stimulus #4.
Japan: Huge stimulus package coming:
- Japans first significant fiscal stimulus package is due t be rolled out early next week. At 108 trillion yen ($900 billion), it equals 20% of Japan's GDP and is roughly twice the size of the stimulus rolled out in 2008 following the collapse of Lehman Brothers.
- The direct fiscal spending component will include $358 billion, including $55 billion for cash payouts to households and small business and $239 billion to allow deferred social security and tax payments.
- The first stage of the package will focus on easing corporate funding strains and protecting jobs. The second phase will focus on boosting demand for industries currently hit by social distancing policies such as tourism and event organisers.
- Japan is also set to announce a state of emergency for Tokyo and six other prefectures after a spike in coronavirus infections in key centres.
US: Negotiations for stimulus #4 heat up:
- As negotiations continue in the US on a stage 4 stimulus plan, the latest news suggests that rather than huge outlays on infrastructure improvements, but rather looks set to focus on extending programs from the last package. Estimates currently sit at a package size of $1 trillion to be delivered sometime between the end of April and the middle of May.
- On this note, the Trump administration is requesting Congress approve an additional $250 billion for the small business retention program. Currently the Democrats are proposing that half this is channelled through community based institutions and also proposing an additional $250 billion for small communities, protective gear and food stamps.
- Following the approval of the CARES Act two weeks ago, Treasury Secretary Steven Mnuchin is flagging that direct deposits to Americans will begin next week.
Equities - Continued strength as 'flattening curve' reduces risk aversion: Another positive week for Australian equities (+6.3%), following the lead from offshore markets as they rallied on increasing hopes that there was light at the end of the COVID-19 tunnel. Cyclical sectors (and REITs) outperformed defensive sectors, both domestically and overseas. However, the ASX200 index underperformed its global counterparts as concerns around bank dividends saw all 4 majors substantially lag the broader market. This week we saw more companies withdrawing guidance (ADI, ALU) and cancelling/deferring/reducing dividends (BOQ, GEM) or downgrading guidance (CPU) although it has slowed to a trickle compared to previous weeks. We continue to think that earnings forecasts are due a much deeper downgrade cycle, but a lack of transparency has corporates and analysts sitting on the sidelines. As was the case with previous weeks, several companies (FLT, GEM, KMD, OSH, SCP, SXL) tapped the market for equity raisings. To date there has been $7bn in capital raisings at an average discount of 28%. The big story during the week was APRA announcing that it expects banks during the next few months will "seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer", the news of which immediately sparked a selloff in the banks sector.
Fixed income - Eyes on the EU: Long-end sovereign bond yields rose across the board (~10-30bps) in part due to the improved optimism but also in part due to challenges in the Eurozone. The big issue this week centred on the proposed issuance of EU backed bonds that would be used to assist countries that have been hardest hit by the virus. Effectively, these bonds would see the mutualisation of EU sovereign debt which has strong opposition from countries like the Northern EU members while other members (France, Italy, Spain, Portugal etc) favour the move. After a 16 hour conference call, the finance ministers of the EU could not agree an approach which saw spreads between different EU sovereign bonds widen (Italy in particular). There is little doubt that the EU will have to do something to support the hardest hit countries however, at this stage it is unclear what form this might take. Credit markets were well supported across both cash bond markets and in the more liquid credit derivatives market (IG: 20bps to 104 bps and HY:~90bps to 616bps) as sentiment for risk assets improved generally. New issuance remains strong as does the demand (on average deals were around 7x oversubscribed) - the total stood at U$40bn for the week (ended Wednesday). Domestically, unsurprisingly, the RBA left rates unchanged but did comment that its bond buying program (currently the balance sheet stands at A$36bn) was having the desired impact as liquidity conditions continue to improve. This prompted the Bank to state that they could ease off the bond buying and purchase less government bonds. Consequently, the Aussie 10 year closed the week 20 bps wider.
REITs - Rent relief for tenants: The REITs sector strongly outperformed the broader equity market during the week. The big news during the week was the announcement on 7th April by the National Cabinet of a mandatory Code of Conduct for commercial leases, under which there is to be a minimum of 50% loss sharing between landlords and tenants proportionate to turnover changes of the tenant. Landlords cannot evict their tenants, and tenants must honour their leases.