Victorian virus outbreak will recalibrate economic recovery

A patient transport vehicle prepares to transport a resident from of one of nine public housing estates locked down due a spike in COVID-19 coronavirus numbers in Melbourne Picture: AFP

Australia’s sharemarket broke a four-day winning streak and shares of companies with significant exposure to Victoria underperformed, as the impending closure of the Victoria-NSW border threatened to deal a fresh blow to consumer confidence in the nation’s second-most populous state.

After shrugging off Melbourne’s worsening second wave of coronavirus in recent days amid a strong bounce in global markets, the local bourse turned down sharply late on Monday as sellers pounced.

Australia’s benchmark S&P/ASX 200 index initially rose 0.3 per cent amid strong gains in regional markets, before falling 43 points or 0.7 per cent to a two-day low of 6014.6 points.

Share trading value was about 40 per cent below average after Independence Day in the US.

Among shares of companies that derive much of their earnings from Melbourne, REA Group tumbled 3.5 per cent to $106.82, Crown Resorts fell 3 per cent to $9.49, Transurban Group fell 2.4 per cent to $14.27, Seek fell 2.6 per cent to $21.70 and Domain Holdings eased 1.7 per cent to $3.54.

Banks also lost ground, with Westpac down 0.5 per cent to $18.45 and ANZ falling 0.4 per cent to $19.12. National Australia Bank dropped 0.2 per cent to $18.70 and Commonwealth dipped 0.2 per cent to $71.42. The Information Technology sector outperformed, with WiseTech up 4.5 per cent to $21.46.

But the Australian dollar rose as much as 0.6 per cent to US69.83c – its highest point in almost four weeks – as the greenback lost ground against the major currencies.

NAB chief economist Alan Oster said the impact of the further shutdowns in Victoria would have a large economic impact and much would depend on how long the NSW-Victoria border was shut.

“The closure to NSW doesn’t help but it’s hard to tell in a fundamental sense what’s going to happen,” he said.

“It’s clearly negative, it probably means the September quarter won’t be as strong as we had previously expected but then again the June quarter was better than expected.”

On Friday the S&P/ASX 200 hit a three-week high of 6101.4, at which point it was up almost 5 per cent in four days and about 18 per cent below a record high of 7097.2 in February.

The local bourse bounced as much as 41 per cent from a seven-year low of 4402.5 in March to a three-month high of 6198.6 in early June, at which point it was trading on a record-high 12-month forward price-to-earnings ratio near 21 times and a record-low dividend yield near 3 per cent, following unprecedented monetary and fiscal policy stimulus amid coronavirus lockdowns.

S&P 500 futures rose as much as 1.4 per cent on Monday as the US recorded its lowest daily increase in coronavirus deaths since March, even as the recorded number of US cases hit a daily record.

Meanwhile China’s sharemarket led strong gains in the Asian region, with the Shanghai Composite surging 5.7 per cent on the back of enthusiastic commentary from the nation’s state media.

But the prospect of a fresh blow to the confidence of consumers and businesses from the worsening pandemic in Victoria, combined with the prospect of fiscal support programs expiring in September, may serve to limit any optimism from the Reserve Bank of Australia after its monthly board meeting.

“The RBA could strike a mildly upbeat outlook, but we expect the bank to retain a broadly neutral outlook until the September meeting when key support measures are expected to expire,” TD Securities senior Asia-Pacific rates strategist Prashant Newnaha said.

Federal Treasurer Josh Frydenberg will give updated economic forecasts and a review of the federal fovernment’s JobKeeper and JobSeeker schemes in an economic statement on July 23rd.

“Whether the JobKeeper scheme will be allowed to completely expire, or a gradual phasing out via tweaking turnover thresholds and continuing to support some industries is unclear,” NAB’s director of economics, Tapas Strickland, said.

“We would argue for a phased tapering of JobKeeper and greater targeting to businesses that are still in the hibernation phase.”

He noted that a quicker-than-expected easing of restrictions (in states other than Victoria) had seen a sharp pick-up in economic activity, driven partly by pent-up demand.

“Victoria’s virus resurgence, though, warns the pandemic is ongoing and that the ‘bridge to recovery’ may be of an unknown length and may need to be extended,” Mr Strickland cautioned.

“Specific industry sectors exposed to international travel are also unlikely to come out of hibernation until border restrictions are gradually eased.”

Mr Strickland noted that a loss of household income was a “natural consequence” of reduced government support from extraordinarily-high levels at a time of elevated unemployment.

“That, though, does not need to derail the recovery if containment restrictions continue to be eased and business activity picks up as we have seen recently in the high frequency data,” he argued.

But the resurgence of the virus in Victoria is “worrying” as it will reverse recent gains in the state.

“It is hoped that new lockdowns will bring the virus back under control in the next few weeks,” Mr Strickland said.

“This is a crucial short-term issue for the Australian economic outlook and a key test of the test and trace strategy.”