Buckle up for a rollercoaster ride as market volatility continues

Investors are steeling for another fraught week on financial markets as Europe goes into lockdown.

Sharemarkets around the globe have been in free fall for the past month amid heightened fears of the economic threat of the virus.

Investors are steeling for another fraught week on financial markets as Europe goes into lockdown and the US Federal Reserve prepares to slash rates, with analysts warning of increased volatility and further declines ahead as the coronavirus pandemic threatens to plunge the global economy into recession.

The warnings come after Australian and US sharemarkets staged a stunning rebound on Friday on the back of central bank action and US President Donald Trump declaring a national emergency, unlocking $US50bn ($80bn) in funds to support the US economy.

Locally, the Australian market posted its best-ever intraday turnaround on Friday, swinging from an 8 per cent loss to a 4.4 per cent gain in the space of a few hours as the Reserve Bank injected $7bn of liquidity into the financial system.

Wall Street on Friday night surged close to 10 per cent following Mr Trump’s announcement as the US Federal Reserve signalled it would boost its cash injections to $US5.4 trillion over the next month.

But as countries across Europe, including Spain and France, go into lockdown to stem the spread of the virus, and fears rise that the virus could be more widespread in the US than reported, Investors Mutual investment director Anton Tagliaferro warned of further volatility.

“Markets are just totally volatile and unpredictable, and really, on a day-to-day basis, I think the moves are fairly meaningless,” Mr Tagliaferro told The Australian.

“Markets are nervous, there’s a lot of uncertainty around everyone trying to assess what this all means. There’s obviously going to be some economic fallout but the question is how long will the economic downturn last and when will the world recover from this.”

Since the COVID-19 outbreak began in China in December, the virus has killed more than 5800 people and infected more than 156,000 across the globe. In a bid to slow the spread, countries have resorted to extraordinary measures, including closing borders and shutting down businesses and schools.

Mr Trump last week imposed a ban on travellers from mainland Europe to the US and over the weekend extended that ban to Britain and Ireland.

Australia has advised against gatherings of more than 500 people and has imposed a travel ban on arrivals from a number of countries including China, Iran and Italy.

On Sunday Scott Morrison announced additional measures including that all arrivals to Australia must self-isolate for 14 days. He also banned all cruise ships from Australian ports for at least 30 days.

Sharemarkets around the globe have been in free fall for the past month amid heightened fears of the economic threat of the virus. Between February 20 and Friday lunchtime, the local sharemarket shed 32 per cent of its value, bringing a swift and sharp end to its lengthy bull run. The stunning rebound on Friday afternoon reduced the loss to 23 per cent.

But Cyan Investment Management director Dean Fergie said he didn’t expect the ASX to hold on to Friday’s gains when it opened on Monday.

“The news coming out of Europe is a lot worse and people are starting to realise that things in Australia are going to get worse before they get better,” Mr Fergie said.

“So I suspect we’re probably going to see another leg down. It might bottom out then and we’ll see sparks of volatility where the market thinks ‘this is probably the bottom — let’s get in and buy’.

“I have no doubt that on a long-term prospect it is a very, very good buying opportunity. But it is not for the faint-hearted.”

Managing director of Yarra Capital management, Dion Hershan, said markets were responding to the panic seen in other parts of society and there had been a degree of complacency in the system prior to the correction.

“It’s impossible to predict the short-term outlook for stocks. History suggests panics like this tend to be a great opportunity but you need to be able to live through (or ignore) the extreme volatility over coming months.

“Australia’s financial markets are small and open, so the tone and direction is likely to be heavily influenced by what is happening in the US and EU,” he said.

As in Australia, markets in the US staged remarkable rebounds to close out last week.

The Dow Jones Industrial Average surged 1985 points, or 9.4 per cent, to 23,185.62, while the S&P 500 gained 230.38 points, or 9.3 per cent, to 2711.02, and the Nasdaq jumped 9.4 per cent to 7874.88.

But further volatility is expected this week ahead of the US Fed’s rate-setting meeting on Wednesday and Thursday.

On March 3, the US central bank executed the first emergency rate cut since 2008, bringing the benchmark rate down to 1-1.25 per cent. It is widely expected to drop the target rate to 0-0.25 this week but there are growing concerns that it may be using its firepower too early and that it will also not be enough to offset the downturn in factory production and consumer spending. Amid fears the US could be the next country to face a rapid acceleration in case numbers, Mr Fergie warned of the potential for dramatic sharemarket falls in the near term if its coronavirus cases start to double every two to three days. “There’s every chance you could see (Wall Street) fall 15 per cent. It could happen within a couple of days,” he said.

In Australia, the federal government last week announced a $17.6bn stimulus package in a bid to avert a recession, including $750 handouts to households receiving benefits, instant asset write-offs for businesses and wage assistance for apprentices and trainees.

The nation would need stronger government intervention to soften the blow to the economy, Mr Tagliaferro said, with further stimulus packages needing to be targeted.

“The government needs to sit down and get its head around which sectors are most severely impacted, and which are important to the Australian economy,” he said as he listed hotels, resorts, airlines, restaurants and student accommodation as among those hardest hit.

“(The government) has to think very hard about how they’re going to help companies get through the current downturn. The truth is none of those sectors envisaged a situation where volumes would drop 50 or 60 or 80 per cent. It’s very difficult if you’re highly leveraged, but even if you’re not too leveraged, you’ve still got to try and survive the current downturn.”

His advice for investors was to hold quality stocks that weren’t too leveraged.

“If you’re thinking of investing, it’s probably not a bad time on a three to five-year view. But I would exercise caution because at this stage, it’s difficult to know the severity and length of the downturn that the global economy is facing.”

Mr Fergie said he would not be investing in travel and lending-related companies because the risks were too high.

“If you’ve got a book of personal loans or business loans or equipment finance … investors just aren’t going to be able to pay that money back in the short to medium term, in a doomsday scenario. At the smaller end of town, there’s going to be a lot of businesses that are really going to go through a very, very difficult patch over the next three months.”