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Macroeconomic Update

14 August 2020

Reconciling the market disconnect

  • It’s apparent that many investors were ‘voting’ for a sharp rebound once the dark COVID-19 clouds cleared. The S&P/ASX 200 Index ticked past 6,000 points in early July and is once again in bull market territory.
  • The past three months of hyper growth rates in online sales have been the equivalent of the past three years of cumulative growth. In the U.S, a similar story, as investor sentiment recovered during the quarter on optimism that the negative economic impacts of Covid-19 will not be as severe as initially feared and hopes that monetary policy support will avert a deep, prolonged global recession.
  • Despite the optimism, spates of volatility continued to hamper global equities during the quarter, exacerbated by simmering geopolitical concerns and fears of a potentially more disruptive second wave.
  • While markets have shown strength, risks remain. Geopolitical risks, while ever present, continue to impact market volatility. Tensions between the US and China are elevated, and the outcome of the US presidential election in November remains uncertain.

Where to from here?

  • The Australian economy contracted by a relatively mild -0.3% in the March quarter but given the full impact of shutdowns likely to be felt in the June quarter, it is almost certain that the Australian economy is in its first recession in 29 years.
  • Against that backdrop, the question now becomes “where to from here” and without a doubt one of the most important factors in the coming months will be the extent to which governments continue with fiscal measures to support the economy.
  • To date, businesses and households have received significant government support from the JobKeeper and JobSeeker programs, the launch of the $25,000 Homebuilder program, and other incentives by state governments.
  • Further easing of lending criteria by APRA in addition to loan repayment deferrals by the major banks has lent further support.
  • In late July, the Government announced the extension of the JobKeeper program (albeit at a lower rate), which was no doubt welcomed by the broader business community, particularly retail as we move towards the end of 2020.
  • The Reserve Bank of Australia’s outlook for the economy and interest rates was recently described by Governor Lowe as a world “where there’ll be a shadow from the virus for quite a few years”, causing “deflationary forces” and “large output gaps.” The RBA kept rates on hold at 0.25% at its July meeting and is prepared to scale up bond purchases if needed.

Disclaimer: The information contained in this document is based on information believed to be accurate and reliable at the time of publication. Any illustrations of past performance do not imply similar performance in the future. To the extent permissible by law, neither we nor any of our related entities, employees, or directors gives any representation or warranty as to the reliability, accuracy or completeness of the information; or accepts any responsibility for any person acting, or refraining from acting, on the basis of information contained in this newsletter. This information is of a general nature only. It is not intended as personal advice or as an investment recommendation.

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