Markets braced for news of coronavirus spread

Fiscal support for the major economies is growing, central banks are primed to act, and yet investor sentiment is ‘far from euphoria’.

Some investors reacted to plans for substantial new fiscal stimulus in Australia and Europe before knowing how bad things will get. Picture: AFP

Fiscal support for the major economies is growing, central banks are fully prepared to pump even more liquidity into global financial markets, and yet investor sentiment is “far from euphoria.”

While no longer at “peak panic” levels seen in March after a near simultaneous meltdown in most asset classes following the global spread of coronavirus and the unprecedented restrictions on movement, the BofA Global Equity Risk-Love index was still neutral as of Tuesday.

On a contrarian basis, that suggests risk assets can go higher as long as fundamentals don’t worsen.

“Global Equity Risk-Love continues to dwell in the neutral zone, now in the 43rd percentile of its history since 1987, after recovering from peak panic in March,” says BofA’s head of APAC and global EM strategy, Ajay Singh Kapur. “Narrower spreads, lower put-call ratios and stock-to-stock correlations, and subsiding volatilities were some of the more conspicuous moves.”

The neutral Global Risk-Love index fits with BofA’s Bull & Bear Indicator of global cross asset risk for July, which was 3 points, fairly distant from the worryingly bullish levels above 8.

The BofA Fund Manager Survey Cash Indicator for July was at just 4.9 per cent, only mildly above the prior 10-year average level of 4.7 per cent, “implying that investment managers have preserved some dry powder instead of going all out.”

“It is worth remembering that sentiment indicators are constructed to be contrarian only at the extremes, while they suggest going with the flow for readings in between,” Mr Kapur says.

It comes after sharemarkets in the US, Australia and Europe broke key chart resistance from their June highs – albeit tentatively in the case of the Euro Stoxx 50 index.

Volatility was cheap relative to the last five months, with the VIX index of volatility on S&P 500 futures traded below its 200-day average for three-days in a row for the first time since February.

But a substantial pullback in Australian shares on Wednesday – much of it in response to the worsening coronavirus pandemic in Victoria – showed that to some extent investors reacted to plans for substantial new fiscal stimulus in Australia and Europe before knowing how bad things will get.

After surging 2.6 per cent to a four-month high of 6156.3 points on Tuesday after a $21bn extension of fiscal stimulus in Australia and agreement on a €750bn ($1.2 trillion) Rescue Fund for the European Union, Australia’s S&P/ASX 200 share index dived 1.3 per cent to 6075.1 on Wednesday as Victoria reported a record 484 new cases of the coronavirus and the situation in NSW remained tense.

CSL and BHP were the biggest drags on the market – with BHP coping a downgrade from Citi after its production guidance disappointed analysts – but a number of shares that rose Tuesday in response to the stimulus extension lost ground, with Qantas down 3.4 per cent, Transurban down 2.3 per cent and NAB down 0.8 per cent and Domain down 2.4 per cent as the worsening pandemic threatened to offset much of the good news in terms of additional stimulus and vaccine developments.

The Australian dollar seemed impervious as it marched up to a 15-month high of US71.68c – albeit mainly in response to US dollar weakness and commodity price strength – but it showed some fragility late Wednesday when it dropped to US71.12c after China said the US government abruptly closed its consulate in Houston in an “unprecedented escalation” between the two biggest economies.

S&P 500 futures fell 0.3 per cent after rising 0.4 per cent in Asian trading, while West Texas crude oil futures fell 0.9 per cent and Comex copper futures fell 1.2 per cent.

Precious metals floundered as the US dollar rebounded, with spot gold recovering to $1848.10 an ounce after hitting a low of $US1841.58 earlier. Gold is closing on the record high of $US1921.17 it hit in 2011. Spot silver also fell back after surging an incredible 7 per cent overnight.

To some extent there’s scope for a reality check as the coronavirus worsens globally, with US President Trump warning that the US outbreak will probably get worse before it gets better, and Tokyo’s governor telling residents to avoid unnecessary trips outdoors.

Also concerning for so-called herd-immunity and vaccines development, a report in the New England Journal of Medicine found that antibody levels fall quickly after recovery from the virus.

Anxiety about the need for more fiscal stimulus in the US and caution about the corporate earnings outlook might also be an excuse for a reality check in shares.

After all the S&P 500 has bounced almost 50 per cent in four months.

But US politicians have a long history of last minute agreements to increases spending.

Time may be running out but investors shouldn’t be against a “phase four” US fiscal stimulus package being passed before the August recess, and it may exceed the mooted $US1 trillion.