Bank of Melbourne

Morning Report

Main Themes: Meltdown is the word to describe financial markets over the past day. Panic intensified last night.

Main Themes: Meltdown is the word to describe financial markets over the past day. Panic intensified last night.

Share Markets: Losses overnight were rather extraordinary. The Dow Jones and S&P 500 indexes recording their biggest declines since Black Monday in 1987.

The Dow Jones lost 2,352.6 points (or 10.0%). From its peak on February 12, the Dow Jones is down 28.3%. The S&P500 index lost 261 points (or -9.5%).

Trading in US share markets was also suspended overnight.

European shares lost 12.4%, a one-day record, as US President Trump's travel restrictions slammed airline shares. The Euro Stoxx 50 Index dropped 360 points (or -12.4%).

At home, the ASX200 dropped 7.4% yesterday, to a level not seen since November 2016. Another sharp drop is inevitable today, after the moves on global share markets overnight.

Interest Rates: US global bond yields fell overnight, but rose from overnight lows to close 4 basis points higher on the 2-year and 7 basis points higher on the 10-year. At one point, the US 10-year yield had hit 0.63 before closing at 0.80%. The US 2-year yield hit an overnight low of 0.35% before closing at 0.48%.

The US Federal Reserve injected $500 billion worth of liquidity through the repo market, promising above $5 trillion in total for money markets.

Bond yields in Italy jumped, partly on the surprise decision by the European Central Bank (ECB) to not lower interest rates, but also on the likely prospect of a ramp-up in government spending in Italy amid a difficult budgetary position.

In Australia, 3-year swap rates yesterday closed at 0.58%, only mildly above their record low. The Australian 10-year yield is at 0.79%.

Foreign Exchange: On February 25 in this report, we warned the risks lied to the AUD/USD heading to 0.6000 in coming weeks, reflecting mounting downside risks from weakening world growth, commodity price falls and heightened risk aversion. The technical downtrend also remaining firmly in place for AUD/USD. We flagged major support at 0.6300 needed to break first. Overnight, AUD/USD broke under 0.6300 falling to a low of 0.6264. A decline now to 0.6000 remains in sight in the near term.

Volatility will also continue to be high, so expect the AUD/USD to continue to trade in wide ranges. In the past 24 hours, the trading range was 0.6264-0.6492.  

The US dollar strengthened overnight against a basket of major currencies and emerging market currencies. This strengthening in the USD caused EUR/USD to fall to 1.1050 and USD/JPY to rise to 106.10.

Commodities: Oil (WTI spot measure) was down 4.5% overnight and has recorded violent declines over the past week. Other commodity prices also plunged overnight, as fears of a world recession continued to grip financial markets.

COVID-19: The number of global cases now stands at 134,183 and the number of deaths at 4,965. In Australia, the number of cases has risen to 156 and the number of deaths remains at 3. The number of cases will continue to rise, given the patterns offshore.

The hardest hit country outside of China remains Italy. The situation in Italy worsened; the total number of fatalities rising to 1,016 and cases to 15,113. Italy overnight imposed further restrictions on its population with only essential stores now to remain open and limited numbers of people allowed in stores at a time.

New York City declared a state of emergency and the state banned all events over 500 people. France will close schools and universities starting Monday. Germany is prepared to abandon its long-standing balanced-budget policy to help contain the economic fallout.

The leading US infectious-disease official said the country's testing system in the country is failing and US President Trump said he's considering curtailing domestic travel if an area suffers a major outbreak.

Australia: Yesterday, the Federal Government unveiled a $17.6 billion stimulus package to support the economy to counteract the impact of the coronavirus.

Support was mostly geared towards businesses, including investment incentives and handouts for small and medium-sized businesses and some cash payments to households. 

There were a number of key features of the package. These included:

(1) Cash payments to households, a one-off $750 payment to those on income support – such as pensioners and Newstart recipients.

(2) Business investment instant asset write-off: The government has expanded the existing scheme by lifting the threshold from $30k to $150k and expanding the coverage to firms with turnover of up to $500 million (previously was $50 million).

(3) Business investment accelerated depreciation measure: This incentive is for the 15 months to mid 2021, for businesses with a turnover up to $500 million.

(4) Boosting cash flows for small and medium-sized businesses for the period to mid 2020:  The aim is to encourage firms to continue employing staff. The payment, up to $25k a business, is in effect a partial refund on tax withheld by the ATO on income tax paid by firms for their employees.

(5) Boosting cash flows for small businesses via a wage subsidy for retaining apprentices and trainees.

(6) Regional areas support for those areas severely affected by COVID-19.

The measures will provide some support, particularly over Q2, and will offset some of the negative economic consequences from the coronavirus. It follows a $2.4 billion funding package for the healthcare sector to better prepare the healthcare system for the coronavirus announced on Wednesday. However, it would be unlikely enough to prevent a recession over the first half of 2020; indeed, we continue to expect a contraction in GDP over Q1 and another in Q2. Much also depends on the confidence in authorities in managing the virus impact in Australia over the next few months.

Europe: The ECB expanded its monetary easing measures. These included additional long-term funding or longer-term refinancing operations (LTROs) and providing more favourable terms on its targeted longer-term refinancing operations (TLTROs). Quantitative easing will also be expanded temporarily; an additional €120 billion of net asset purchases will be added to the ECB’s quantitative easing programme on top of the €20 billion of asset purchases each month.

A decision to leave interest rates unchanged was not expected by markets, particularly for the -0.50% deposit facility rate.

In the press conference that followed, ECB President Lagarde stated that the decision to leave the deposit rate unchanged was not an indication that rates were at their lower bound. Lagarde called out to governments to provide a greater fiscal stimulus, stating that the response needed to be “fiscal first and foremost”.

United States: US President Trump yesterday announced travel restrictions from Europe to the US, suspending all travel from 26 countries in the Schengen border-free travel area to the US for the next 30 days from Friday midnight. The UK has been exempt from the restrictions. US citizens were also exempt but must self-isolate for 14 days if they were returning from the specified countries in Europe. In his announcement, Trump stated that it would also limit trade and cargo, but this was later clarified by a Whitehouse spokesperson and Trump over twitter to just stop people and not goods.

Overnight, the Democrats and Republicans fought over a coronavirus relief package, leaving its prospects uncertain. House Speaker Nancy Pelosi sought "common ground" as she negotiated with Treasury Secretary Steven Mnuchin. Majority Leader Mitch McConnell said the Senate will stay in session rather than take a planned vacation. Trump said he opposed the legislation, which includes emergency paid sick leave, enhanced unemployment benefits and free virus testing.


Today's key data and events:

NZ BusinessNZ Manufacturing Feb prev 49.6 (8:30am)

NZ Food Prices Feb prev 2.1% (8:45am)

JN Tertiary Industry Index Jan exp 0.0% prev -0.2% (3:30pm)


Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are our forecasts and for other countries they are consensus forecasts.


Besa Deda, Chief Economist & Janu Chan, Senior Economist Ph: 02-8253-0898