World hunkers down for fight against virus

The Federal Reserve is tipped to cut rates further in coming months as the coronavirus hits the US economy

Gondoliers wait for customers near St Mark's square in Venice as tourists stay away from Italy. Picture: AP

Sharemarkets were heartened by Joe Biden’s improved US presidential prospects and an emerging fiscal response to the coronavirus outbreak, while the Australian dollar firmed on expectations of further US rate cuts and Australian government bond yields rose amid hopes of fiscal stimulus.

A day after the local sharemarket hit a nine-month low on concern that rate cuts won’t stop an economic downturn caused by the global spread of coronavirus, the S&P/ASX 200 share index rose 1.1 per cent to 6395.7 points.

That followed a 4.2 per cent jump in the S&P 500 — its second 4 per cent-plus rise this week — after Biden’s unexpected success in US Democratic primary elections reduced the odds of Bernie Sanders gaining the presidential nomination and delivering his plans for interventionist policies.

Investors were also encouraged by bipartisan support in the US for a $US7.8bn ($11.7bn) emergency spending bill to fund the response to the outbreak and news that the IMF was making $US50bn available.

The Australian market recently fell as much as 13 per cent in seven days, its worst seven day fall since the global financial crisis, as the S&P 500 also fell 13 per cent in its fastest correction in history.

The bounce in US stocks flowed through to Asia yesterday, with China’s Shanghai Composite up 2 per cent, Japan’s Nikkei 225 up 1.1 per cent, Korea’s KOSPI up 1.3 per cent, Taiwan’s TAIEX up 1.1 per cent and the Hang Seng up 2.1 per cent. Futures pointed to a 0.9 per cent decline in the S&P 500 overnight.

The Aussie dollar set a two-week high as economists dialled up expectations of US rate cuts, and the 10-year bond yield rose 6 basis points to 0.78 per cent as the government hinted at fiscal stimulus.

Treasurer Josh Frydenberg said the government would spend more than a $1bn on a stimulus package to offset the impact of the virus albeit with a focus on helping small businesses.

“We are focusing on ensuring that businesses stay in business, Australians stay in jobs and that the cash flow will be maintained,” Frydenberg told Sky News.

“We’ll have a series of measures that is responding in a targeted, scalable way but also a responsible way. What we are giving serious consideration to is an investment-type allowance.

“What we do want to focus on is supporting small business and we’ve also seen a direct impact in key sectors like tourism, education and our agriculture sector.”

CBA senior economist Belinda Allen said the budget balance would go “further into the red” as discretionary fiscal stimulus was deployed alongside automatic stabilisers like unemployment benefits.

“In the current economic situation, this is more than appropriate,” she said. “The question is not whether the budget will be in surplus or deficit, but how big the deficit will be.”

Frydenberg also said it was clear after an IMF phone hook-up on Wednesday night with economic leaders that many countries were considering fiscal responses to revive economies.

It came as markets projected another 25 basis point cut in Australia’s official cash rate to 0.25 per cent by June and a further move below that point, implying expectations of quantitative easing.

The market was also projecting a further 75 basis points of cuts in the US funds rate this year.

Westpac chief economist Bill Evans flagged additional US rate cuts in March, April and June as the rapid spread of COVID-19 threatened the US economy.

“In the first instance that threat came in the form of a sharp tightening in financial conditions as equity prices tumbled, credit spreads spiked and primary credit markets effectively closed,” he said.

The Fed responded to that tightening in conditions by lowering the federal funds rate by 50 basis points this week — between scheduled meetings — after which Fed chair Jerome Powell repeated last Friday’s warning in an emergency statement about “evolving risks associated with the coronavirus”.

Evans cautioned that “the virus will weigh on the US economy for some time yet”.

“Our reports indicate that ‘only’ around 500 tests had been completed by March 2,” he said.

“As the testing process ramps up and announced cases start to lift the virus is expected to weigh heavily on activity in the US, particularly the consumer.”

He expected a “significant lift” in US cases before a peak at the end of the June quarter as warmer weather, appropriate health practices and, potentially, antiviral drugs were introduced.

Amid signs of responses to the virus, supply disruptions, the cancellation of travel and events such as sporting fixtures and conferences, and slowing growth in discretionary spending, Evans saw businesses suspending hiring and possibly cutting staff.

These trends were expected to gather momentum into the June quarter and become more apparent to the Fed through confidence measures and other high frequency data and jobs reports.

“The consumer is expected to be particularly vulnerable to these developments,” Evans said.

A “stalling” of US consumer spending, less business investment and a “COVID-19 shock to net exports” was expected to see the Fed cut rates at its March, April and June meetings in the face of a potential contraction of US economic growth.