Weekly Market Update 8th June 2020

Markets

Local and global equity markets pushed higher this week, almost completely ignoring increased US/China tensions and an America on fire.
In local stock news, Vicinity Centres axed its dividend and launched a large $1.4 billion equity raising to improve its balance sheet and provide a buffer to help manage the impact on its business caused by the lockdown measures. The company also marked down the value of their property book by 11-13% and stated that foot traffic in centres was back at 74% of last year’s levels.
Qantas has announced they will scale up flights on domestic and regional routes in June and July. Capacity will increase to 15% of pre-virus levels, or more than 300 return flights a week by end of June.
US private equity firms Bain Capital and Cyrus Capital Partners are the final preferred bidders to acquire Virgin Australia. There were three other bidders who now might decide to partner with the remaining parties.
The iron ore price pushed through US$100 a tonne for the 1st time in 10 months on supply concerns out of Brazil, helping lift Australian iron ore miners.
The Aussie dollar soared close to 70c against the US dollar as the US dollar continued to weaken this time on worsening riots throughout most American states.

Economic

The Australian economy contracted by a better than expected 0.3% in the 1st quarter with annualised growth falling to 1.4%, the slowest pace since September 2009. Absent government spending, the fall would’ve been worse, with private demand contracting 0.8%. Exports and imports of services fell sharply. A sharp fall is expected in the 2nd quarter which would push the economy into recession.
The RBA left the cash rate unchanged at 0.25%, re-confirmed current support measures, and reiterated its commitment to keeping policy settings very accommodative for as long as required.
Australian retail spending fell by a record 17.7% in April given the strict lockdown measures, after sales rose in March by a record 8.5%. Compared with the same time last year, retail trade was down more than 8%. Online sales continue to grow, a change which may become permanent.
Total credit to the Australian private sector was flat in April with mixed results across the underlying components. Credit to housing owner occupiers grew 0.5% whilst credit to investors fell by 0.2%, business credit continued to rise due to liquidity issues, and personal credit fell by 3% and now sits more than 9% lower than the same time last year.
The RBA Governor has made it clear that any withdrawal of the government’s fiscal stimulus risks destabilising the recovery. The call came after the Federal Government is already looking to wind back its stimulus packages on better than expected recent data. Winding it back or not extending it would be a mistake, but so is creating a false economy.
The Australian banking regulator chair has told banks to prepare for the long haul and warned that the idea that the financial system will return to normal is naïve. He went on to say that the crisis will result in an enduring change in the way society operates and that temporary measures won’t simply get us back to normal.
Australian dwelling prices fell by 0.5% in May whilst turnover lifted, bucking expectations for deeper falls. Government policies are helping to prop up the market. These will need to continue to prevent any further falls.
US consumer spending, which accounts for approximately 70% of US economic activity, fell more than 13% last month. This was the biggest drop since the data series began in 1959.
US economic growth contracted by 5% in the 1st quarter, the deepest pace of decline since the 4th quarter of 2008. Consumer spending fell close to 7% in the same quarter.
India’s economic growth rate fell to an 11 year low of 4.2% as the country heads for a recession due to the impact of the virus. Manufacturing and construction sectors contracted. India’s economy expanded by 6.1% in the prior year.
China’s factory activity grew at a slower pace in May but momentum in the services and construction sectors quickened. Manufacturing slowed for a 2nd straight month whilst export orders contracted for a 5th consecutive month. More stimulus is required.

Politics

The Federal Government has announced new stimulus for the housing market which is laughable at best. Most won’t qualify for it or be in a position financially to renovate or build in order to gain access. Even putting that aside, the package has been costed at a little over $700m which is almost loose change in the current environment.
Australia will toughen its foreign investment rules with the Foreign Investment Review Board now screening all deals in which a foreign investor buys an interest in a business deemed sensitive to national security regardless of the value of the acquisition.
It looks increasingly likely that China will target Australian coal next by promoting the use of their domestic coal through tighter import rules. The move is hardly surprising given recent tariffs on barley and restrictions on meat imports. The move is a setback for China’s environment given their much lower quality coal.
US President Trump had an eventful week completely cutting ties with the World Health Organisation, removing Hong Kong’s special privileges and declaring he will impose sanctions on Chinese and Hong Kong officials. He then went as far to threaten martial law on US states who don’t get their act together to stop the violent rioting and looting. He also put social media companies on notice threatening them with changes to legislation which would remove their legal protections after Twitter foolishly decided to fact check Trump’s tweets.