Shares bounce on stimulus talk, but crisis ‘yet to peak’

Australian stocks bounced more than 7 per cent on Tuesday as investors looked to a US fiscal response to the coronavirus.

Traders work during the closing bell at the New York Stock Exchange on Monday, US time Picture: AFP

The Australian sharemarket staged a remarkable recovery on Tuesday, bouncing more than 7 per cent as investors pinned their hopes on a US fiscal response to the coronavirus.

But fund managers warned global markets continued to be extremely volatile as investors struggled to price the epidemic’s uncertain impacts.

The dramatic rebound came after a plunge in oil prices on Monday compounded concern about the financial and economic effects of the outbreak, triggering the biggest one-day fall in shares and sharpest tightening of financial conditions since the financial crisis.

After dropping 7.3 per cent on Monday as crude oil prices plunged about 30 per cent after Saudi Arabia had started a price war after the breakdown of talks to limit supply due the virus, Australia shares were expected to open down 5.6 per cent after a 7.6 per cent fall in the S&P 500.

But after opening down 3.8 per cent on Tuesday, the S&P/ASX 200 index staged a remarkable intraday turnaround.

After hitting a 15-month low of 5538.9 in early trade the S&P/ASX 200 surged 7.2 per cent from the low, closing up 3.1 per cent at 5939.6 points. It was the biggest one-day rise since November 2016.

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The financials, technology, materials and healthcare sectors outperformed, with CBA, Xero and BHP rising at least 6 per cent and CSL up 4.4 per cent. Meanwhile Beach Energy rose 7.9 per cent as Brent crude oil futures jumped 8.1 per cent to $US37.18 a barrel a day after plunging 31 per cent to $US31.01.

“Market reaction to coronavirus continues to be extremely volatile as investors grapple with how long and widespread the impact will be,” AMP Capital portfolio manager Dermot Ryan. “We are still not yet at ‘peak panic’ and markets are beginning to grasp the issues of this outbreak to demand and supply.”

Australian shares tracked a huge rise in US stock index futures after US President Donald Trump flagged a major US economic stimulus package to offset the impact of the coronavirus pandemic.

S&P 500 futures rose as much as 3.7 per cent, implying a potentially massive rise on Wall Street.

The Australian market narrowly avoided slipping into a bear market — a closing fall of at least 20 per cent from a peak. Monday’s swoon left it 19.7 per cent below the closing record high of 7162.5.

“I will be here tomorrow afternoon (Tuesday, US time) to let you know about some of the economic steps, which will be major,” Trump said at hastily arranged press conference at the White House.

Mr Trump also flagged a payroll tax cut and “very substantial relief” for virus-affected industries.

BlackRock Investment Institute said the recent fall in sharemarkets, while “reminiscent of the global financial crisis”, won’t be an “expansion-ending event — provided that a pre-emptive and co-ordinated policy response is delivered”.

And there were “encouraging signs that this policy response is starting to come together.”

“It will need to be a joint and decisive effort between fiscal and monetary policy…the key vulnerabilities that need to be addressed: cash challenges faced by companies, especially small- and medium-sized enterprises, and households,” BlackRock Investment Institute said in its latest bulletin, titled “Market plunge: This is not 2008”.

Bloomberg later reported quoting unnamed sources that the US package promised by Mr Trump will likely include a payroll tax cut and a short-term expansion of paid sick leave.

Industrial commodities bounced back, with Dalian iron ore futures up 3.8 per cent, while London Metal Exchange copper rose 1.7 per cent a day after hitting a three-year low.

The renewed demand for risk assets sapped demand for safe havens. Gold fell 1.8 per cent to $US1649.48 an ounce a day after hitting a seven-year high of $US1703.39. US 10-year bond yields rose 15 basis points to 0.70 per cent a day after hitting a record low of 0.31.

Also helping market sentiment, China’s President Xi Jinping visited “ground zero” in Wuhan city, fanning hopes of an imminent lessening of the strict quarantine of about 60 million people in Hubei province, possibly facilitating a resumption of industrial production.

The share prices of numerous Chinese companies with sizable operations in Hubei surged within minutes of the announcement by China’s official Xinhua News Agency, Bloomberg reported.

China’s Shanghai Composite rose 1.8 per cent, Japan’s Nikkei 225 rose 0.9 per cent, South Korea’s KOSPI gained 0.4 per cent and the Hang Seng index rose 1.4 per cent.

“Assuming the coronavirus outbreak is contained in the next couple of weeks, we still believe equities should advance this year from current levels,” Morgan Stanley Wealth Management strategist Alexandre Ventelon said.

“The easing of trade tensions and support from both monetary and fiscal policies are the key drivers for the recovery, and should both remain supportive of the growth environment.

“However, we need to see signs of moderation in new coronavirus cases ex-China and more clarity on the economic impact of the virus (among other factors) before allocating to risk assets again.”

There was also some hope of new fiscal stimulus in Japan, with Prime Minister Shinzo Abe telling reporters his government will coordinate with the Bank of Japan and respond appropriately on measures, if needed, to combat the effects from the new coronavirus.

Prime Minister Scott Morrison said the impact of coronavirus could be worse than the global financial crisis, fuelling bets of a domestic stimulus package of $10bn or more.

The Australian reported that pensioners, Newstart recipients and small business owners are ­expected to be considered for one-off cash payments to help funnel money back into the economy and protect jobs under the Morrison government’s multi-billion-dollar response to the coronavirus.

Josh Frydenberg has confirmed that the stimulus package, expected to be signed off by the cabinet expenditure review committee on Tuesday, would be substantial.