Central banks to the rescue as stimulus hopes spark rebound

Growing expectations of a co-­ordinated central bank response sparked a bounce in Australian shares, the dollar and bond yields.

Traders work the floor of the New York Stock Exchange. Picture: AFP

Growing expectations of a co-­ordinated central bank response to turmoil in global markets sparked a strong intraday bounce in Australian shares, the dollar and bond yields even as China’s economy appeared to slow more than expected and the spread of coronavirus outside of China worsened.

Economists now expect the Reserve Bank to kick off a fresh round of central bank stimulus by cutting its official cash rate by 25 basis points to a fresh record low of 0.5 per cent when its meeting concludes on Tuesday afternoon and cut again to 0.25 per cent next month.

The Bank of Japan is also thought to be mulling additional stimulus after BoJ governor Haruhiko Kuroda issued an emergency statement on Monday morning saying the BoJ “will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases”.

After diving 3 per cent to a 10-month low of 6245.2 points after China’s official purchasing managers indexes plunged to record lows and retail brokers closed out margin positions following last week’s plunge, Australia’s S&P/ASX 200 index closed down just 0.8 per cent at 6391.2 points.

Financials bore the brunt of the selling ahead of expected rate cut by the Reserve Bank. However, beaten-up sectors including energy and technology staged a recovery.

It was the first sign of a reprieve from a vicious sell-off that wiped almost 13 per cent or $275bn off the Australian sharemarket in the past seven days in one of its fastest corrections in history.

“Last week I said ‘don’t buy yet’, but now I think this week is the right time to start the buying,” said Bell Potter head of institutional sales and trading Richard Coppleson.

“This rally will be violent but it will be sold into — markets almost always re-test their lows.”

European shares opened stronger across the board, with London’s FTSE up more than 2 per cent in early trade and Germany’s Dax up 1.5 per cent on opening.

Despite heightened concern about China’s economic outlook and the global spread of coronavirus, the Japanese yen lost some of its recent safe-haven appeal after the BoJ statement on Monday.

As the yen lost ground against most currencies, the Australian dollar recovered to US65.46c after initially diving back toward the 11-year low of US64.60c that it hit on Friday night.

Similarly, the 10-year Australian commonwealth government bond yields almost fully recovered after plunging 15 basis points to a record low of 0.669 per cent that was almost 10 basis points below the cash rate, implying a decade of ultra-low rates.

The fall in bond yields came as the 10-year US Treasury yield set a record low of 1.0283 per cent.

US Federal Reserve chair Jerome Powell said on Friday that the “coronavirus poses evolving risks to economic activity” and the Fed would “act as appropriate to support the economy”.

Westpac chief economist Bill Evans said the “highly unusual” verbal intervention by world’s most powerful central bank was “a call to action for other central banks around the world”.

Mr Evans was one of several market economists predicting RBA rate cuts in March and April and an unusually large 50 basis point rate cut by the Fed when it meets on March 19.

JPMorgan Australia chief economist Sally Auld said the chance of a 50 basis point cut “is not small”.

“There is also the possibility that the RBA brings other policy measures — liquidity-related — into play.”

The money market was more than fully priced for a 25 basis point cut in the cash rate to 0.50 per cent on Tuesday and it was fully anticipating a further cut to 0.25 per cent by July.

In the Asia-Pacific, China’s Shanghai Composite rose 3.2 per cent, Japan’s Nikkei 225 rose 1 per cent, South Korea’s KOSPI gained 0.8 per cent and the Hang Seng index rose 0.6 per cent.

Brent crude oil futures rose 2.2 per cent to US51.63 a barrel, Dalian iron ore rose 5.4 per cent to CNY650.50 a tonne, and London Metal Exchange copper rose 1.5 per cent to $US2.5805 a pound.

US stock index futures pointed to a 0.7 per cent rise in the S&P 500 after initially falling more than 2 per cent, but the gold market showed some ongoing safe-haven demand.

Spot gold rose 1.3 per cent to $US1606.68 after diving to $US1563.07 on Friday.

Morgan Stanley Australia equity strategist Chris Nicol upgraded his rating on the Australian sharemarket to “equalweight” after the benchmark index plunged below his 6700 target level.

But he also recommended a shift to more defensive positioning amid deepening global risks.

“Our advice is to now take a more defensive position as events unfold. This result season has seen continued weak growth outcomes,” Mr Nicol said.

“The current risk backdrop continues to gravitate towards more sustained disruption — this is something hard to ignore and positioning should reflect as much. So while the sell-off in recent days leaves the ASX 200 near 5 per cent below our price target of 6700 we believe that until the extent of disruption and growth impacts are known, calling a ‘buy the dip’ moment is premature.

We concur with our global team that a recovery will occur, however until valuations can find an earnings anchor to hold on to caution is required around the direction of travel for the index.”

Meanwhile UBS analyst Jonathon Mott placed his ratings on Australian banks under review pending a “regulatory response” to the sell-off in financial markets because of the coronavirus outbreak.

“We remain cautious on the banks, noting that absolute valuations remain elevated and banks are highly leveraged to interest rates and economic activity,” Mr Mott warned.

He noted that with the continued outbreak of COVID-19 the market was more than fully pricing in two interest rate cuts and some chance of quantitative easing in Australia this year, and he expected an announcement from the Council of Financial Regulators and potentially the federal government. “Given the emergency nature of any rate cuts, banks will be under pressure to pass through the vast majority of the cuts,” he said.