Stocks surge on hopes of a big-spending budget

Australian shares staged a $47bn rally, their biggest surge in four months, as investors bet on a big-spending federal budget to deliver economic support.

Tresurer Josh Frydenberg during a Cabinet meeting with Ministers on Monday, October 5, 2020 the day before the 2020 Budget papers are released . Picture: Adam Taylor

Australian shares staged a $47bn rally, their biggest surge in four months, as investors bet on a big-spending federal budget to deliver economic support while the global mood turned positive that US President Donald Trump would leave hospital soon after receiving treatment for COVID-19.

The rally comes as the Reserve Bank meets on Tuesday with some economists tipping the central bank could add to the fiscal kick-start with a rate cut, although the bulk of the market betting has pushed out easing moves to next month.

After diving 2.9 per cent last week and 1.4 per cent on Friday after Mr Trump’s COVID-19 diagnosis, Australia’s benchmark S&P/ASX 200 share index surged 150 points or 2.6 per cent to a four-day high of 5941.6 — its best day since June 16.

The Australian dollar also improved, rising as much as 0.4 per cent to a two-day high of US71.92c, while the fixed-income market was closed for a public holiday in some states.

Crude oil plunged to three-week lows on Friday as a resurgence of coronavirus in the US and Europe threatened to hit demand while supply from Libya picked up, but US shares fell less than expected.

Then over the weekend, the US President set the stage for a bounce in markets as he appeared in reasonable health during a brief exit from hospital and urged politicians debating additional US fiscal stimulus to “get it done”.

S&P 500 futures rose as much as 0.9 per on Monday, boosting regional markets, with Japan’s Nikkei 225 index up 1.2 per cent, the Hang Seng up 1.2 per cent and South Korea’s KOSPI up 1.3 per cent, while China’s financial markets remained closed for National Day holidays.

Commodities were mixed, with spot gold down as much as 0.7 per cent to $US1887.04 an ounce and Comex copper futures down 1.2 per cent to $US2.943 a pound, but WTI crude oil futures surged as much as 3 per cent to $US38.17 a barrel after losing 8 per cent in the past two days.

Energy was the strongest sector on the Australian sharemarket with Oil Search up 7.5 per cent.

Shares of companies that should benefit from improving coronavirus trends domestically as well as an expected highly stimulatory federal budget on Tuesday that softens the December quarter “fiscal cliff” and improves the economic outlook outperformed, with Bendigo Bank up 5.5 per cent, Stockland and Qantas both up 4.9 per cent and the four major banks rising between 3.6 and 4.4 per cent. The sharemarket valuation of Australian banks, property trusts and other dividend-paying companies could also benefit from any further lowering of interest rates by the Reserve Bank.

However, the local bourse was driven up more by a lack of selling than strong buying.

With a public holiday in NSW and Queensland draining participants from the market, the value of trades in S&P/ASX 200 companies shrank to $3.21bn — the lowest volume since January.

Still, while expecting the Reserve Bank to keep rates on hold when it meets on Tuesday until cutting further in February, Morgan Stanley Australia equity strategist, Chris Nicol said a “sustained fiscal pulse” from the budget would be important for Australian financial market and investor positioning.

“A double-barrelled policy event is loaded for Tuesday, but we expect only one shot fired, with the RBA waiting and assessing the federal budget later in the evening, in what will be a pivotal marker for the COVID-19 recovery,” Mr Nicol said in a report on Monday.

“The tricky dance that is evolving crisis support into growth stimulus has started, and the music needs to not only lift consumption but also bring business intentions back onto the floor.”

A broad focus to spark economic growth — tied to a clear target of boosting employment — suggests that the fiscal pulse from this budget will be one of “significant scope and duration” and represent an “important regime shift for the market”.

“We expect the budget to be stimulatory, expanding the 2020-21 deficit to $230bn, and include $30bn of new spending measures,” Mr Nicol said.

The focus of Tuesday’s budget should shift towards permanent growth measures that stimulate private demand, including income support via tax cuts, investment incentive, unemployment benefits, as well as greater infrastructure spending which is smaller in scale, faster to market and more labour intensive, as well as deregulation, he said.

“While the market is pricing the possibility of RBA easing, we expect they will stay on hold this meeting, preferring to give the budget centre stage and assess its impact,” he said.

But economists at AMP Capital, Capital Economics, HSBC and UBS also expect the RBA to cut its official cash rate on Tuesday to a new record low of 0.1 per cent from 0.25 per cent currently — potentially along with measures like expanded bond buying to lower longer-term interest rates — in a unified “Team Australia” approach between the central bank and the government, given the unprecedented challenge of getting the economy back on track.

Westpac, TD Securities, Standard Chartered, Nomura, NAB, Macquarie, Laminar Capital, Goldman Sachs and Bank of America expect the central bank to wait until November before cutting again, according to a Bloomberg poll released on Monday.

RBA deputy governor Guy Debelle set out the potential options for further easing last month.

They included lowering the cash rate to 0.1 per cent, buying longer-dated government bonds, currency intervention and negative rates, although he said it was “not clear” that FX intervention would be effective now and the evidence on negative rates was “mixed”.

Despite the recent underperformance of the Australian sharemarket and support for the Australian dollar near US70c, the domestic money market was leaning toward cuts on Tuesday.

The three-year commonwealth government bond yield closed at 0.165 per cent on Friday versus the RBA’s current yield-curve control target of 0.25 per cent.

Economists expect the government to announce a 2020-21 budget deficit of $220bn, pushing Australia’s debt up to $712bn or 32 per cent of GDP this fiscal year.

The budget is expected to deliver faster personal tax cuts, policies to boost business investment, extension and redesign of JobSeeker and JobKeeper, infrastructure investment, an expanded HomeBuilder scheme, a manufacturing strategy and steps to boost the supply side of the economy.