Until Friday night, it appeared neither fire, disease nor war could stop it.
A seemingly unstoppable force for months, global stocks have been on a relentless bull run powered by the sheer weight of money.
A debilitating trade war that has chipped away at global growth and left European powerhouse economies on their knees couldn’t dent the enthusiasm.
Each time the market faltered, the White House wheeled out the prospect of a truce and punters dived back in.
Even the prospect of a military conflagration in the Middle East sailed blithely past the trading desk jockeys as they pushed company valuations into the stratosphere.
Fear spreads easily
The economic impact of coronavirus is not about how many people get sick or die. Even if relatively few people are affected, it could still pack an intense financial punch, writes Ilan Noy.
We’ve been a little late to the party but, once aboard, there has been no looking back.
From New Year’s Eve on, even as the nation burned, our stock market went wild, punching through new records as it piled on almost 7 per cent in just a few weeks.
The unwelcome and frightening arrival of the coronavirus may change all that. On Friday night, Wall Street took a backward step.
While the market reaction has been decidedly muted, it’s now becoming clear that the pandemic has the potential to hit our national income and tip the economy into a period of contraction, possibly even recession.
That prospect will weigh heavily on Reserve Bank officials as they gather around the table in Martin Place tomorrow for the first time in two months.
If you believe the financial market pundits, there’s almost no chance the RBA will cut rates.
But with the devastating toll of the bushfires yet to be tallied and the prospect of a complete shutdown of our most lucrative tourism market for several months, the odds of an interest rate cut are significantly higher than the 10 per cent chance predicted just a few days ago.
Tied to China
China. Some say we have an unhealthy relationship with the Middle Kingdom; that we are too reliant on one nation. One-third of all our trade is done with China.
Not only is it our biggest export market for minerals, but it also ranks number one in our third biggest export, tourism. Ironically, it’s a health issue creating ructions in our economic relationship.
Last week as the coronavirus infections gathered pace, Beijing decreed that all outbound group tours would be halted for two months.
Last year, almost 1.5 million Chinese tourists visited Australia, with the most lucrative portion being the 165,000 students in our universities and colleges.
Student cancellations are flooding in with serious flow-on effects to those who provide housing and other services.
If previous health contagion events are anything to go by, the economic impact, while severe, is likely to be temporary. But at this point, it is impossible to quantify the damage to our economy.
Where things could get messy is if the virus hits Asian region and global growth, which has the potential to seriously damage our sputtering economy. Beijing on the weekend announced yet another stimulus program, adding to its already eyewatering debt levels.
Even worse, this comes as a catastrophic bushfire season is still in full swing.
The entire world has been focused on Australia and fires and there is no doubt our reputation as a safe tourism destination has taken a battering which could last well beyond this year.
Even Treasurer Josh Frydenberg conceded yesterday on ABC’s Insiders that he was concerned the fires and the virus had the potential to hit investment, consumption and trade.
“What we do know is that these events outside our control are going to have a significant impact on the Australian economy,” he said.
Money markets tipping swift action
Stock markets may have merely taken a breather from their relentless march northward, but the reaction on debt markets has been swift and severe.
US government bonds — a safe haven for worried capital — are in hot demand as cash floods in. Money markets are making a bet that the virus will hit global growth and that America will be forced to cut interest rates yet again.
It’s a similar story here. Bond yields have slumped in anticipation of a rate cut in the near future: if not tomorrow, then within the next few months. The Australian dollar has slumped around 4 per cent in a month.
For the past week, most financial commentary has focused around a recovery in the local economy.
Inflation was gathering pace and unemployment improved, they argued.
While the headline numbers suggested some much-welcomed relief, a dig beneath the surface revealed a drop in full-time employment and core inflation stubbornly below RBA targets.
Even without the crippling impact of the twin disasters confronting us, further rate cuts seem almost inevitable.
Why the disconnect with stock markets?
Back in October, something weird happened. A relatively obscure part of the US money market known as the Repo Market ran out of cash.
It’s officially called the Repurchase Market and it allows banks to lend to one another overnight using high-quality collateral like US Treasury Notes.
Interest rates, which had been hovering between 1 and 2 per cent, suddenly jumped to 10 per cent and more.
The main reason appeared to be that America’s central bank, the US Federal Reserve, had been winding back the stimulus it injected into the market as part of its desperate moves to reignite the US economy after the global financial crisis.
It was trying to gradually retrieve the cash it had injected. Wall Street sputtered as the cash shortage hit stocks and in a panic, the US Fed again began injecting cash into the system.
US Federal Reserve — reigniting cash splash
Between August and now, it has pumped more than $400 billion into the US economy, around two-thirds of the money it had withdrawn in the previous 18 months.
As it did, Wall Street again took off and global stock markets followed.
All of which leaves the US with a dilemma; how on earth will it ever be able to wean Americans off stimulus without causing a stock market crash?
Fed boss Jerome Powell knows only too well that a Wall Street collapse would most likely precipitate a recession.
So, from now on, it is likely global interest rates will remain low and are likely to be cut again, if only to keep stocks afloat.
Add in a global crisis like a health pandemic, and rate cuts are a certainty.
US President Donald Trump may be right. It seems the system really is rigged.
More on the coronavirus outbreak:
- Coronavirus update: Information about the outbreak and how you can protect yourself
- What the updated coronavirus travel alert level and additional border measures will mean for you
- The WHO has declared a global emergency for just the sixth time. Here’s what that means
- Australian lab recreates coronavirus, helping vaccine push
- What exactly is coronavirus and should you be concerned?