Concern shifts to the credit markets amid liquidity fears

Tiedemann’s view. Cartoon: John Tiedemann

As the stockmarket heads into bear market territory after panic selling on Monday, the concern is shifting to credit markets where high-quality issues are seeing spreads widen and the junk of the market is tightening.

The panic is caused by uncertainty as to just where the coronavirus will end up and how it is being contained, compounded now by an OPEC brawl between Russia and Saudi Arabia. Falling oil prices are normally treated as good news, but in these circumstances it’s all bad news.

Just how long the liquidity concerns last will depend — like the equity sell-off — on signs of an easing in the coronavirus. But yesterday the New Zealand Reserve Bank took the unusual step of issuing a joint statement with the banks saying “they are ready to respond to the impacts of the virus”.

Early last month, APRA issued a directive to all its regulated entities seeking an update on the fallout, particularly as it affected liquidity. But so far neither it nor the Reserve Bank have issued a formal statement.

The RBA did cut short-term rates last week by 25 basis points, which was passed on in full, including to business borrowers.

In US markets, spreads on AA-rated bank paper widened from 85 to 120 basis points — which, other things being equal, will be passed on to business borrowers.

Bank loan losses that have long been benign may start increasing as small businesses in particular cope with the loss of income caused by the stockmarket panic.

Jefferies analyst Brian Johnson said: “We are a long way from a GFC-type scenario on credit markets, and it all depends on how long the turmoil lasts. There are a string of back measures like the RBA’s supplied committed liquidity facility which can be used to help the banks.”

The big Australian banks all topped up funding early this year, so are in good shape right now. Ironically enough, the chair of the Australian Banking Association, Matt Comyn, hosted ABA chief Anna Bligh at the Women’s T20 World Cup cricket final at the MCG on Sunday. The joyous mood was not repeated the following day on financial markets.

Small business people say few are looking for new loans because they don’t have the confidence. And where it’s a question of survival, they are looking to this week’s federal government statement for help.

Small business wants emergency loan status granted to bushfire victims extended to those affected by the virus — which means a payment holiday for two years, among other measures.

Big companies also are not looking at expansion options right now, with everyone in a state of confusion about the economic damage the virus may wreak.

Some business people argue the authorities have overreacted and are a little trigger happy, ­itself is feeding the sense of panic.

The government’s statement, as urged previously, should be targeted at people who are actually going to spend the money.

This includes schemes such as apprentice assistance packages through employer tax deductions, low-income rental assistance and low-income tax rebates.

A general tax deduction, just like interest rate cuts, would ­simply be added to savings as ­people prepare for a potential ­recession and an increase in ­unemployment.

Trading in the US on Monday night will help determine what happens in Tuesday’s trading in Australia, but brokers have reported widespread panic selling. This normally comes ahead of a bounce — although this time around no one is saying just when that will happen.

AMP’s Shane Oliver said a market bottom happens when there is panic selling and stocks are undervalued, adding: “We might be getting close to that level, but the trouble is the virus news just gets worse.” Buyers were looking for signs that the spread of the virus in the US had slowed, but the reverse is the case.

It’s not the virus that is doing the damage but the measures being put in place to stop its spread, which are both failing and damaging to the real economy.

A bear market occurs if stock prices fall 20 per cent, which hasn’t happened in Australia since 2015, and a 7.9 per cent fall like Monday’s hasn’t happened since 2008.

On all previous occasions the issues were economic — the GFC, or Brexit, or the European debt crisis in 2011 — but this time around its health-related and no one has the answers.

Good idea, bad timing

Amid the turmoil, FINSIA chief Chris Whitehead is showing his UK counterpart Giles Cuthbert around town trying to raise support to install a bank-led Professional Standards Board governing the ethics of the local industry. In concept, it’s a great ­initiative but the timing is perhaps a little off as the local banks shore up their defences for a potential long-term tightening of credit, which will hit the industry hard.

Facing up to Facebook

The office of the Australian Information Commissioner has been around for a decade as Australia’s privacy commissioner but until Monday has not taken litigation against alleged breaches.

This makes the landmark case against Facebook all the more important because it shows the commissioner, Angelene Falk, is now finally ready for action. This is important because in other jurisdictions, such as the US, privacy actions are also handled by the competition regulator (their version of the ACCC), whereas in Australia the roles are separated.

Oracle and others have urged Falk to check both Google and Facebook for potential breaches.

The office has previously flagged an investigation into talk of privacy breaches by Google but no claims have been made.

In this case, she alleges the use of Facebook’s This is Your Digital Life app may have seen information lodged that was used for other purposes including potentially to Cambridge Analytica.

“These were systemic failures to comply with Australian privacy laws by one of the world’s largest technology companies,” Falk said.

Just what happens remains to be seen, but the mere fact she has taken the matter to court is a ­welcome development.

Productive progress

The Federal Productivity Commission handed then treasurer Scott Morrison its Shifting the Dial report in August 2017 and it was released in October that year. But apart from a first rate speech on the report, Morrison has done little. Maybe the wheels are starting to turn because in June the Queensland Productivity Commission will convene a meeting of its counterparts in Sydney, Adelaide and Canberra to advance the cause.