CORONAVIRUS IMPACTING GLOBAL MARKETS
In response to the concerns around COVID-19 Virus and the resulting supply chain pressures and impact on global growth, the US Federal Reserve slashed the Fed Funds rate by 50 basis points at the beginning of Tuesday (Wed AU) trading in the States. Equity markets tumbled again for the second time in less than 7 days, with traders abandoning risk-based assets for the safe harbor of gold and long-dated treasuries.
Gold rallied 1.5% on the news to above US$1,620 (AU$2,433), building on its seven-year highs, and at the time of writing is sat above US$1,640.
RESERVE BANK TAKES ACTION
This followed the Reserve Bank of Australia’s decision on Tuesday, to cut the official cash rate 0.25 percentage points to 0.5 percent. A low not seen since the turbulence of the 2008 Global Financial Crisis. This does leave us with the question of where can the RBA go from here? It is generally understood that any further cut in a cash rate of 0.25 percent would likely result in a program of ‘Quantitative Easing’ or QE. However, it wouldn’t be Mortgage Backed Securities that the RBA will be purchasing on mass as we saw with the Fed in the US following the GFC.
It may be timely to remember that when the markets cough, it’s usually the average Joe / Jill that ends up with the flu
It will more than likely consist of a program of purchasing Bonds and Cash securities, pushing up the price of those securities which in turn forces the yields to drop – the theory is this drop in yields will then be felt in the wider economy, reducing the cost of lending and making your monthly mortgage repayment more affordable.
CAN THE SAME TACTICS WORK AGAIN?
Along with the rate cut came a call for Australians to spend, spend, spend, with rumours of a return to a ‘one-off’ bonus payments system. The $900 handouts of 2009 were an intravenous injection of stimulus, meant to be spent frivolously on that new laptop you wanted but couldn’t afford or that much needed weekend away. Any bonus payment in 2020, however, may face a very different challenge.
What happens when that laptop is out of stock or those airline flights cancelled?. With ‘China Inc’ struggling to meet demand amid the effects of COVID-19 and more and more citizens globally choosing to stay at home, any bonus stimulus may have very limited effect if any.
With all eyes now on the global efforts to contain COVID-19 Coronavirus and the potential impact on global trade, it may be timely to remember that when the markets cough, it’s usually the average Joe / Jill that ends up with the flu.
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