Update on 18 March 2020
Two important developments have taken place over recent days:
- On Monday 16 March the Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate by 0.75% to a new record low setting of 0.25%. Floating lending rates have adjusted lower in the wake of the move, and fixed term mortgage rates had already moved lower last week. Term deposit rates have dipped too, but by smaller amounts, only by around 0.1% at the time of writing.
An important aspect of the RBNZ’s announcement was related to the outlook for future RBNZ policy and interest rates within the local economy. Having cut the OCR to 0.25%, the RBNZ said it “will remain at this level for at least the next 12 months”. The RBNZ also said that “should further stimulus be required, a Large Scale Asset Purchase programme of New Zealand government bonds would be preferable to further OCR reductions.” For investors, this means that the low interest rate environment will continue over the year ahead.
- The Government announced a significant economic stimulus package yesterday at 2pm. The package is large – it amounts to around 4% of GDP, or $12.1 billion. A summary of our ASB Economics team’s thoughts regarding the key elements of the package is below:
- The first focus is on health, with $500 million boost for health services.
- The overall $12.1 billion COVID-19 package is a good start in terms of magnitude. The Government’s books are in a good place to incorporate this spending and future COVID-19 packages.
- However, some aspect of the package will place an administrative burden on Government departments and businesses, which may slow implementation. For the future, we favour broader and simpler measures.
- A sharp contraction in the economy is unavoidable, but this will soften the blow slightly.
Beyond the local developments, we have also seen central banks ease monetary policy settings in Europe and the US this week.
Financial markets remain volatile - in both directions. Last Friday the US sharemarket rose by over 9% for example, only to reverse all those gains this week. The US sharemarket is currently down circa 25% from its peak, while the local sharemarket has declined 22%. Bond markets have also been very active. Government and investment grade bond yields remain extremely low. Within our diversified portfolios bonds have provided some offsetting support to the share market declines over the past month.
12 March 2020
The rate of new coronavirus cases in China has started to slow and it is reassuring to see their strict quarantine measures playing an effective role in the containment of this virus. Manufacturing has started to pick up again, with many Chinese cities reporting activity climbing back up to 80-90% of normal levels.
Europe, on the other hand, is still experiencing a rise in the number of new cases. Italy has especially struggled to contain the virus, and now the entire country has been put under quarantine. Eyes are also turning to Spain, as a potential hotspot area for a rapid rise in new cases.
Markets have now reacted to the fear that the coronavirus outbreak will significantly impact global growth, rather than merely be a short spike of volatility. Investors are also concerned that monetary and fiscal policy stimulus alone will not be timely enough to counter the significant economic disruption caused by COVID-19. The last few days have seen wild moves, both down and up, in global equities, commodities, currencies, and fixed interest markets.
On Monday 9 March we saw a sharp fall in oil prices following the failure of Russia and Saudi Arabia to agree to production cuts. This was a catalyst for a large slump for global stocks. US stock indices were 6-8% below their previous open after sharp falls to stocks triggered a temporary trading halt and reached close to bear market territory (20%+ below peaks). The major European equity indices were also down around 8% and the Nikkei slumped 5%. The Australian ASX 200 plunged 7%, while locally we coped a bit better with the NZX 50 falling around 3%.
Governments have started to roll out fiscal packages to cope with the coronavirus, and this will support sentiment at the margin. US President Trump pledged “major” steps this week, but was light on detail, apart from hinting at a payroll tax cut and some targeted support for the airline and cruise industries.
Locally, we expect the RBNZ to cut the Official Cash Rate, but at this time it appears the RBNZ is comfortable to wait until its scheduled meeting on 25th March. In a speech this week Governor Orr said “time is on our side” and again noted the limitations of monetary policy in dealing with a viral outbreak.
2 March 2020
Over late February, share-markets around the world have sold off amid rising concerns about the potential for the coronavirus to spread further than initially anticipated. The aggressive response to contain the virus has caused a collapse in activity in China, and impacted activity elsewhere, resulting in earnings implications for a number of businesses. On the other hand, safe-haven assets such as local and global government bonds have rallied.
Although we are now seeing the virus spreading rapidly, with new countries reporting their first cases daily, fuelling fears of a global pandemic, economic activity in China has now started resuming. The large industrial heavyweight has many areas seeing above 80% resumption rates.
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