Overnight: Monopoly Money

By Greg Peel

Bottom Held

The futures had it wrong yesterday in suggesting another -200 point fall for the ASX200, in the wake of Wall Street’s biggest one-day fall since ’87. For one, we had posted our biggest one-day fall since ’87 ahead of Wall Street, for two, more and more stimulus has been announced, including from our own government, and for three, US futures rebounded during our session, and four, the worst session in a bear market episode is typically followed by a bounce.

Although typically, the biggest fall takes us to the new low, and that didn’t happen. In rallying from the open yesterday, the ASX200 avoided a retest of Friday’s 4879 intraday low by a margin, and yesterday closed almost 400 points above.

So is that it?

Possibly, in the near term. This correction has to date played to the historical script and if it continues to do so, we should see a relief rally now for a period, before retesting the lows in another month or two. One wonders just what new piece of bad news could drive that retest, as surely we have more than priced in a worst case scenario at this point. But if, say, someone big is allowed to go under in the next couple of months, that might be a trigger.

Governments are working hard to ensure that doesn’t happen. But we recall Lehman was just one investment bank too many.

Where this correction deviates from history is its source. 1987 was a classic boom-bust scenario. The virus is a completely different matter. If over the next month the case-rate in the developed world is seen to ease, as is the situation now in China, then the subsequent relief rally will be like no other. If the US, for example, is seen to struggle to contain the spread and the death toll mounts, those prior lows may not hold.

A point to note is that when the US closed its border to Europe, Wall Street tanked. Last night Europe closed its external borders to all comers, and the Dow’s up a thousand points.

Another point to note was that yesterday’s trade on the ASX did not resemble last Friday afternoon’s head-spinning 11% bounce, which would have been driven almost entirely by crowd panic among computers. Yesterday the ASX200 tentatively opened higher, thought about it up to late morning, kicked on, retreated, kicked on again and only then came the usual final flourish. It was an actual rally, supported by actual humans.

The banks have been significant victims in the correction, on both margin pressure implied by further RBA easing and on an anticipated surge in loan defaults. Yesterday they were the stars, with the financials sector surging 9.2%. Nothing has changed the outlook. If they were bought for yield, disappointment may await.

Materials (+9.0) makes a lot more sense, given the iron ore price has not moved during this crisis and China will seek to overcome its economic shock by building stuff. Gold miners were rampant as well yesterday, as while USD gold price dropped overnight so too did the Aussie (under US60c this morning), and as central banks collectively throw everything at their economies, gold must surely be an ultimate winner.

We recall that gold rallied initially as the GFC unfolded, then collapsed under the weight of “sell everything” panic, but once the Fed initiated QE, commenced its journey to the US$1900/oz high.

Consumer staples (+8.3%) also makes sense, even though there’s not a lot to buy on supermarket shelves at present. While the Big Two accounted for much of that sector’s rally, Metcash, as a wholesaler, jumped an extraordinary 27% to take out the ASX200 top five leaders, with gold miners in all of the other four places.

It was a big step down from these three to gains in other sectors, with energy (+0.4%) just getting across the line as oil prices continue their spiral.

UR Westfield ((URW)) topped the index losers’ board (-22.8%), as it is the biggest owner of shopping malls no one is going to, and likely soon will be barred from. If you’re not going to the mall you won’t be passing any outdoor advertising, so oOh!media ((OML)) fell another -16.5% as it swiftly becomes one of the virus’ biggest victims with debt issues now in focus.

One of the only stocks that didn’t collapse on Monday was Domino’s Pizza ((DMP)), but it was hero to villain yesterday (-9.5%) when the company ran into delivery problems.

The minutes of the March RBA meeting were out yesterday but are outdated, given Lowe has all but promised QE in April, if not before. The virus was mentioned 24 times in the release.

The Bank of Japan, which is scheduled to meet tomorrow, pumped US$30bn of liquidity into the system yesterday. Jacinta announced NZ$12bn of fiscal support, while our lot is about to launch fiscal round two, barely a week after round one.

Get ready to duck. Here comes the kitchen sink.

Modern Money Theory

The Fed has now extended its liquidity support for the daily US short term credit (repo) market to both morning and evening hits of US$500bn. The figure is arbitrary. Whatever you ask for you will get. A separate amount has now been put aside for the commercial paper markets.

The Fed also forced all of the country’s major banks to “tap the discount window” effectively backstop their balance sheets with Fed funds even though they said they didn’t need to.

Having passed a bill providing fiscal support directly to the health aspect of the crisis, Congress is now formulating a US$850bn package (although that number is fluid) to provide everything from tax relief for small businesses to financial support for the airlines and Boeing, and on to cash handouts to “every” American, a la 2009’s Pennies from Kevin.

I presume there’ll be an income threshold.

So to sum up, the Fed is now effectively in “infinite” support mode while the government’s net fiscal package is set to top the trillion mark.

Readers might like to revisit this FNArena article from May last year: https://www.fnarena.com/index.php/2019/05/15/modern-monetary-theory-global-saviour-or-highway-to-hell/

It was not a one-way street on Wall Street last night. Stock indices opened higher as the futures had suggested but immediately fell back to square. Presumably this reflects sellers lined up to hit any rally, having been too slow on the way down. But once that was cleared, indices rallied again and of course had a flourish at the death.

The leading sectors, nonetheless, were the defensives.

Commodities

No end in sight yet for base metals and oil but gold cannot ignore massive global stimulus.

And because everyone’s doing it, not just the Fed, the US dollar is up 1.5%, likely aided by Europe closing shop. The Aussie is thus down -1.5% and teetering on the brink of the fifties (US$0.6002).

Today

The SPI Overnight closed down all of -7 points. Can’t recall when we saw the last double-digit move, let alone single-digit.

The Fed will release its policy statement tonight. Not sure what else it can add. The press conference might be interesting though.

The Australian share market over the past thirty days