"Intelligent Insight"
The Jolly Swagmans latest podcast is highly recommended.
Yaneer Bar-Yam is a physicist and the founding president of the New England Complex Systems Institute.
See more about this episode on the Jolly Swagman’s site.
New Zealand banks are ready to respond to the impacts of coronavirus, the Reserve Bank of New Zealand and New Zealand Bankers’ Association say.
The COVID-19 outbreak has the potential to impact the operations of New Zealand’s banking sector by affecting banks’ staff, their funding and their customers.
The Reserve Bank has asked all banks about their risk management approaches and preparedness for COVID-19. Reserve Bank Governor Adrian Orr said the responses show the banks are prepared.
“Much of the banks’ focus has been on staff health and safety, and their ability to sustain their operations should the outbreak expand significantly. However, the banks are also well attuned to any impacts on their customers’ businesses, employment, and incomes,” Mr Orr says.
New Zealand Bankers’ Association chief executive Roger Beaumont says customers financially affected by COVID-19, particularly small to medium sized businesses, are encouraged to contact their bank.
Depending on the customers’ individual circumstances potential options for support include:
“Each bank will have their own credit policies and approach to providing assistance. It’s important for affected customers to talk to their bank as soon as possible. That gives banks the best chance of offering assistance. Helping customers through any financial stress depends on good two-way communication,” Mr Beaumont says.
The Reserve Bank team are in regular dialogue with bank executives and are watching for signs of funding market pressures or emerging signs of credit stress.
“While we have not seen any significant pressures at this stage, we remain in regular contact with stakeholders across the financial sector. At the Reserve Bank we are prepared in our business continuity role to ensure a well-functioning financial system, including enabling access to cash, ensuring sufficient liquidity in the banking system, and managing a stable payments and settlements system,” Mr Orr says.
“All businesses should be preparing for possible disruptions from COVID-19. Think about how best to operate if staff are temporarily unavailable, or if suppliers have restricted stock, cash-flows are interrupted, and sales decline in some sectors,” Mr Orr says.
The latest data from our household surveys to the end of February 2020 shows that the impact of Covid-19 are hitting home. The index dropped again, into uncharted territory, to an all time low of 80.2. I even had to change the scale of the chart to accommodate the fall!
We ask households to compare their levels of confidence today compared with a year back across a number of dimensions, from job security, income, costs of living, debt, savings and overall net wealth (assets less debts). This gives us a comparative series from the 52,000 households in the rolling sample.
Households are reacting to the uncertainty about the future trajectory of the economy, and recent survey results (we run a rolling series to the 5th March), have captured recent stock market falls. The falls are broad based, though households with a property remain relatively more positive, believing that property remains largely immune – we will see.
Within the property segmentation, property investors are on the mat now, as rentals continue to grind down, and property values especially among units have not recovered as much as the generic indices may suggest. Households renting are finding more choice, and lower rents in a number of centres (Hobart excepted). Supply is quite strong.
Most states moved lower, with NSW and VIC taking quite a hit this past month. NSW at 84.9 is the lowest scored state now, thanks to the higher debt leverage there where large mortgages predominate. WA, QLD and SA are bunched higher at around 90.
Across the age bands, we see falls across the board. The financial pressures on younger households of 20-30 and 30-40 are piling up as they continue to feel the issues most severely, older households are buttressed a little more by share portfolios (which are falling) and savings (where rates are falling). But all ages bands fell this month.
Within the index we can look at the elements which drive the scores. Job security slid 1.66% compared with last month with just 4.3% saying they feel more secure than a year ago. 38% feel less secure, an increase of 1.1% from last month, and 47% about the same. The full potential impact on jobs has yet to be absorbed by the community, but around 3 million are working in gig type “flexible” roles. And others will be “encouraged” to take leave to try to stem cash flow issues among businesses.
Households are taking a beating on savings at the bank, with rate cuts eroding returns to the point many households are not getting enough income to cover the basics. And the stock market is off (and falling as I write), with the supply side shock of the virus now translating to a potential liquidity crisis. Safe havens are hard to find for the fortunate few who have savings. Many of course have none and live from pay credit to pay credit.
The cost of debt is falling, so many are seeking to refinance (again) to grab the lower rates available to some. However, only 4.2% are more comfortable with their level of debt compared with a year back, and of course if income from employment falls, paying the mortgage becomes a nightmare. 42.5% are less comfortable than a year ago. Those who recently obtained new mortgage finance appear to be in for the biggest shock thanks to looser underwriting standards of late.
Pressures on incomes remain centre stage with just 1.7% of households saying their real incomes have risen in the past year. More than half of households have seen their incomes fall in real terms over this period, and 40% see no change. Incomes will evaporate for many should the supply side shocks continue.
Costs of living on the other hand continue to bite, with more than 95% of households reporting rising costs over the past year. 5% reported no change, almost no households reported they had fallen. Categories of costs which are impacting including the usual suspects, from energy, fuel, child care and health case costs, plus council rates. But the most insidious are those relating to everyday expense at the supermarket, where drought related hikes abound. The falling exchange rate is also hitting some imports and making them more expensive. Around 25% of households have less than 1 months cash available to meet their commitments if they income seized up.
Yet, overall, the net worth of households improved slightly, with property values higher in a number of locations, though recent stock market falls are dragging wealth down for some.
The big strategic question now is whether the Government understands the true significance of what is happening. Whilst they are talking up a $10 billion package, it appears to be shaping towards investment allowances and other tactical measures. In fact, the level of confidence we are recording in our surveys suggests that households will not be able spend (consumption being a significant share of the economy) and many small businesses will struggle to employ, yet alone survive. The quantum they are discussing is too little too late. I expect confidence to erode even more as things play out and the true horror the economic predicament we are in hits home. And then the following financial crisis also strikes.
The coronavirus outbreak could result in a $319 billion loss for economies in the Asia Pacific, S&P Global Ratings has estimated, with Australia left vulnerable. Via InvestorDaily.
A report from S&P has forecast growth in the APAC will slow to 4 per cent in 2020, the lowest since the global financial crisis, as a result of the virus.
The multinational believes a U-shaped recovery will start later in the year, but by then, economic damage in the region will reach US$211 billion ($319 billion).
Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings has said the loss will be distributed across the household, non-financial corporate, financial and sovereign sectors, with the burden to be on governments to soften the blow with public resources.
“Some economic activities will be lost forever, especially for the service sector,” Mr Roache said.
The hardest hit economies have been Hong Kong, Singapore and Thailand, where people flows and supply chain channels are large.
Australia is also exposed, with S&P forecasting its growth for the year to touch 1.2 per cent, more than half of what it was in 2019 at 2.7 per cent.
“Australia’s most disrupted sectors employ a large share of workers which will weaken both the labour market and consumer confidence,” Mr Roache said.
Services in Australia account for a large slice of employment, the reported noted, with accommodation and catering being sensitive to tourism and discretionary consumer spending.
Along with other economic experts, AMP Capital senior economist Diana Mousina signalled she expects Australian GPD growth to be negative in the March quarter, dragged by the bushfires and the virus.
Last week’s rate cut to 0.5 per cent will assist households with mortgages and businesses with debt, she wrote, but more stimulus is needed. AMP Capital, as well as UBS have called the RBA will enact another cut in April.
Ms Mousina anticipates fiscal stimulus from government, starting with support for businesses hit by COVID-19, followed by a broader boost to help investment and consumer spending.
“However if government stimulus does not prove to be enough (or come early enough) to support the economy then the RBA is expected to start an asset purchase program to further reduce the cost of borrowing,” she said.
As at Friday morning, there were 59 confirmed cases of COVID-19 in Australia, with two deaths.
APRA monitoring hits to financial system
The prudential regulator has indicated it is assessing how the coronavirus outbreak will affect the operation of financial institutions, with chairman Wayne Byres saying the system is positioned to handle volatility, but it will need considerable vigilance.
Speaking to the standing committee of economics last week, Mr Byres said the regulator has also been examining broader economic impacts from the virus.
The financial system has already copped hits from the extreme weather events over the summer. Current estimates for total insured losses as a result of the bushfires, storms, hail and floods across Australia are projected to be in the order of $5 billion. The Australian cyclone system is still yet to end.
APRA has reported the financial position of the insurance sector means it is well placed to cover the claims, however, Mr Byres stated: “The summer’s events will undoubtedly have an impact on the price and in some cases, availability of insurance in the future.”
Sharp fixed and variable rate home loan reductions are set to trigger a spike in refinancing applications through the broker channel, according to Aussie CEO James Symond. Via The Adviser.
Last week, the Reserve Bank of Australia (RBA) lowered the official cash rate by 25 bps from 0.75 per cent to 0.5 per cent – marking the fourth cut since June 2019 when the easing cycle commenced.
This followed a sharp turnaround in sentiment ahead of the RBA’s monetary policy board meeting, with analysts initially expecting the central bank to keep rates on hold.
Developments in the domestic and global economy are likely to have altered the RBA’s tone, with weak local market indicators and the coronavirus (COVID-19) outbreak rattling market confidence.
A host of lenders, including the big four banks announced variable home loan rate reductions in response to the cut.
Bendigo and Adelaide Bank is the latest lender to announce variable rate reductions, passing on the full 25 bps to new and existing customers, effective 27 March.
Bendigo Bank has also cut small business and overdraft variable rates by the full 25 bps, also effective 27 March.
“In an environment experiencing historically low rates, we have carefully evaluated our responsibility to borrowers and communities with the impact lower rates have on depositors, our business performance and all other stakeholders,” Bendigo Bank’s managing director, Marnie Baker said.
“At the same time, many customer and communities are facing a long recovery from bushfires and drought and coupled with the still largely unknown economic impacts from COVID-19, this decision aims to further support our home loan and business customers and our many communities nationwide.”
Adelaide Bank’s head of third-party banking, Darren Kasehagen, added: “These changes will have a direct and positive impact [on] what is a most uncertain time for our home loan customers.”
“The decision allows customers to take advantage of the lowest variable home loan rates that have been available for some time.
“As always, we carefully considered the impact on all stakeholders and the overall cost of funding in arriving at this decision.”
Macquarie Bank and ING, which were among the lenders to drop variable rates by the full 25 bps, have also announced sharp reductions to their fixed rate home loans.
Macquarie has dropped two and three-year fixed rates to as low as 2.64 per cent for owner-occupied borrowers paying principal and interest (P&I) and with a loan-to-value ratio (LVR) of less than 70 per cent.
Owner-occupied P&I rates have also been reduced to 2.74 per cent for four and five-year fixed rates for borrowers with an LVR of less than 70 per cent.
Meanwhile, ING has slashed its fixed rates to as low as 2.49 per cent for owner-occupied P&I borrowers with the Orange Advantage product (3.89 per cent comparison rate).
ING’s investor fixed rates have dropped to as low as 2.74 per cent (4.44 per cent comparison rate).
In light of record-low mortgage rates, Aussie Home Loans CEO Mr Symond has called on borrowers to consider refinancing to save on their repayments.
“I expect many fixed and variable mortgage rates will fall below 3 per cent over the next month,” he said.
“Borrowers should be exploring the market for competitive rates and speaking with a reputable mortgage broker.
“A decision to see a mortgage broker could save borrowers thousands of dollars and years off their repayments over the life of the mortgage.”
Mr Symond added that he is expecting refinance rates to spike beyond 30 per cent of new flows – as currently experienced by Aussie’s broker network.
“Now is a great time to refinance and exploit the strong competition amongst lenders, but borrowers need to get sound, well-researched advice from a credible broker or lender before taking this step,” he concluded.
On 4 March, the Federal Reserve Board (Fed) finalized changes to its capital rules for US banks with assets greater than $100 billion. Via Moody’s.
The final changes increase the flexibility banks have to payout capital more aggressively and will likely give bank management greater leeway to reduce the size of their management buffers and operate with capital ratios closer to the minimum levels required.
The final version establishes a stress capital buffer (SCB) that incorporates the Fed’s stress test results into its regulatory Pillar 1 capital requirements for these banks. Originally proposed in April 2018, the final rule includes a number of changes that weaken the original, making it credit negative for all US banks covered by the rule.
The Fed’s impact analysis of the final rule suggests that in aggregate the Common Equity Tier 1 (CET1) capital requirements at the affected US banks could decline up to $59 billion: $6 billion at the eight US global systemically important banks (G-SIBs) and $35 billion at the rest. Since most banks currently hold a management buffer above existing requirements, the affected banks could actually cut their CET1 capital by twice this amount and still comply with the final rule. The CET1 capital reduction could be $40 billion (a 5% decline) at the G-SIBs, $50 billion (a 21% decline) at other banks with $250 billion or more in assets, and $35 billion (a 16% decline) at
banks with assets between $100 and $250 billion.
Consistent with the proposal, the final rule integrates stress testing into the Fed’s regulatory capital requirements by replacing the capital conservation buffer, which is currently 2.5%, with the SCB. The SCB will be the higher of either 2.5%, or the difference between the starting and minimum projected CET1 capital ratio under the severely adverse scenario of the Fed’s Dodd-Frank Act Stress Test (DFAST) plus four quarters of planned common stock dividends.
Starting in October 2020, if a bank’s risk-based capital ratios fall below the aggregate of the minimum capital requirement plus the SCB, the relevant G-SIB surcharge, and the countercyclical capital buffer (if any), restrictions would apply to capital payouts and certain discretionary bonus payments.
As in the proposal, the final rule changes the current annual Comprehensive Capital Analysis and Review (CCAR) and DFAST process.
The final rule eliminates the assumption that a bank’s balance sheet and risk-weighted assets will grow under the stress scenarios, eliminates the Fed ability to object on quantitative grounds to a bank’s capital plan, and removes the 30% dividend payout ratio as a threshold for heightened scrutiny of a bank’s capital plan. Both the flat balance sheet assumption and the requirement that banks hold capital for only four quarters of dividends rather than for the full amount of planned payouts over the stress test horizon lower capital requirements versus the current stress testing regime.
The decrease is only partially offset for G-SIBs by the first-time inclusion of the G-SIB surcharge within the Fed’s stress test.
The final rule is weaker than the original proposal for several reasons. Under the proposal, banks would not have been allowed to pay out capital in excess of their approved capital plans without Fed prior approval. In the final rule, banks can in most cases make payouts in excess of amounts in their capital plan, provided the payout is otherwise consistent with the payout limitations in the final rule.
Additionally, the final rule modifies payout limitations to allow firms with an SCB in excess of 2.5% to pay a greater portion of their dividends and management bonuses and to repurchase shares for a period of time after capital ratios fall below the requirement. And in the final rule, the SCB, unlike the DFAST capital requirements, will not incorporate material business plan changes, such as those resulting from a merger or acquisition. As a result, such actions will only affect a bank’s capital ratio once the action has occurred.
The final rule also excludes the originally proposed stress leverage buffer requirement, which would not have been a binding constraint for most banks. Its elimination from the final rule removes this requirement as a potential backstop. And without the stress leverage buffer, the still pending proposal to modify the supplementary leverage ratio for the eight G-SIBs by tying it more closely to the G-SIB surcharge could further weaken the ability of the leverage ratio to serve as a backstop requirement and would also be credit negative.
We look at the latest trends on Australian Bonds, Credit Markets and the recent IMF paper on negative interest rates – which they link to the need to restrict cash. This will not end well.
https://www.imf.org/external/pubs/ft/fandd/2020/03/what-are-negative-interest-rates-basics.htm
Australia’s fiscal stimulus package to protect the economy against the impact of the coronavirus may run as high A$10 billion. Via Bloomberg.
The Sunday Telegraph newspaper reported that the package was likely to be $5 billion while broadcaster Sky News said the stimulus could be up to twice this amount. Australia is expected to reveal details of its plans on Tuesday, when Prime Minister Scott Morrison and his Cabinet meet.
Governments around the world have already pledged more than US$54 billion in budget support to counter the virus’s impact. Morrison has yet to put a figure on his plan, which he has said will be “targeted, measured and scalable,” with an emphasis on protecting business cash flow and jobs.
Initial estimates of the coronavirus’s impact from the nation’s Treasury and central bank suggest the economy is likely to suffer a quarterly contraction for the first time in nine years. For Australia, the blow is coming hot on the heels of a summer of devastating wildfires that were already expected to crimp growth.
While the country had only reported 74 confirmed cases of the virus as of Sunday, including three deaths, its economy is particularly exposed to China, the center of the outbreak. China is Australia’s key market for commodity exports and a vital source of tourists and students for the services sector.
The Australian Financial Review reported the package may feature tax breaks to spur emergency investment by big businesses while the Australian newspaper said stimulus could include cash payments to households.
The Sunday Telegraph report said the government was looking at wage subsidies and payments for small businesses. It also said the government may encourage pensioners to spend more by lowering the amount they are allowed to earn from financial assets before receiving government assistance
The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.
Contents:
Transcript (by popular demand).
Hello again, its Martin North from Digital Finance Analytics, welcome to our latest post covering finance and property news with a distinctively Australian flavour. In the review of this week’s news, we look at the market gyrations, central bank responses and the limitations of monetary policy. As normal we start with the global scene, but if you want to jump direct to the Australian section, the time is shown below. And a quick reminder, due to YouTube’s restrictions, I will only discuss the current medical situation obliquely, to avoid demonetisation using the term “Panic Not 101”.
In the US, Stocks closed in the red on Friday, but well-off lows thanks to some late-day buying in what was another hectic final hour of trading. At the close in NYSE, the Dow Jones Industrial Average lost 0.98% to 25,866, while the S&P 500 index lost 1.71% to 2,971, and the NASDAQ Composite index fell 1.87% to 8,575. But then Stocks moved back close to their lows of the day in late trading with investors likely nervous about staying long into a weekend that will be packed with medical related headlines. Losses in the Oil & Gas, Basic Materials and Financials sectors led shares lower.
Volume on U.S. exchanges was 14.2 billion shares, compared to the 10.54 billion average for the full session over the last 20 trading days.
Data showing a robust pace of hiring in February largely went ignored, given that the data captured little of the impact from the “Panic Not 101”. A sharp downturn in later economic and corporate earnings data would likely strike a further blow to U.S. markets, analysts said.
The U.S. Federal Reserve has begun quarantining physical dollars that it repatriates from Asia before recirculating them in the U.S. financial system as a precautionary measure against spreading the virus. Regional Fed banks that help manage the money supply will set aside shipments of dollars from Asia for seven to 10 days before processing and redistributing them to financial institutions. The policy, first reported by Reuters, was implemented on Feb. 21. Is this another covert front in the war on cash? On average, the Fed distributes $34 billion in paper notes every year, according to the San Francisco Fed.
A bill signed by President Donald Trump on Friday will provide US$8.3 billion to bolster the country’s capacity to test for “Panic Not 101” . Trump signed the legislation at the end of a week in which the virus began to disrupt daily life for many Americans. As stocks plunge and U.S. companies grapple with the economic fallout, his administration is also weighing tax relief for the cruise, travel and airline industries.
The S&P 500 posted its 10th decline in 12 sessions as crippled supply chains prompted a sharp cut to global economic growth forecasts for 2020. Since its record closing high on Feb. 19, the benchmark index has lost more than 12%, wiping out $3.43 trillion from its market capitalization.
Even so, for the week the S&P 500, along with the Dow Jones Industrial Average and the Nasdaq, posted a modest gain as stocks on Friday pared losses late in the session. Comments from Federal Reserve officials about the possibility of using other tools in addition to interest rate cuts to blunt the economic impact of the “Panic Not 101” helped stocks ease declines. The S&P 500 gained 0.6%, the Dow added 1.8% and the Nasdaq rose 0.1%. But we still in correction territory, and the markets have no means of assessing the emerging global uncertainties.
The central bank has begun to grapple with what measures it would use if the outbreak of the illness worsens in the United States and causes a severe economic downturn.
Federal Reserve regional bank president Eric Rosengren, participated in the Shadow Open Market Committee economics conference in New York.
“We should allow the central bank to purchase a broader range of securities or assets,” Rosengren said in prepared remark, noting it would require a change to the Fed’s mandate as set by Congress.
The Fed of course slashed its key overnight lending rate by half a percentage point on Tuesday to a target range of between 1.00% and 1.25% in an emergency move to mitigate the effects of the escalating global “Panic Not 101” outbreak on the U.S. economy. Investors are predicting further U.S. rate cuts in the near future.
Rosengren said such an approach would be necessary because if the Fed was forced to slash rates to effectively zero, the circumstances could have changed, which would limit the effectiveness of purchasing only Treasury and mortgage-backed securities, as the central bank did in the 2007-2009 recession. Those large-scale asset purchases or quantitative easing (QE), aim to stimulating the economy.
What changed is the drop in the 10-year U.S. Treasury yield. It fell to a record low of 0.66% earlier on Friday, on pace for its largest daily fall since October 2011 during the depths of the euro zone sovereign debt crisis, amid concerns the Panic Not 101 outbreak could cause a global recession. It ended at 0.773 down a massive 16.4%. The 3-month rate dropped even more, down 18.16% to 0.51 – so the yield curve is not inverted, for now.
“There would be little room for the Federal Reserve to lower rates through large purchases of long-term Treasury securities – like it did to make conditions more accommodative in and after the Great Recession – if a recession occurred in this rate environment,” Rosengren said.
If the Fed did change its policy, it should be accompanied by agreement from the U.S. Treasury to indemnify the central bank against losses, Rosengren added. He did not specify what types of other securities or assets the Fed would buy.
Rosengren also said he remained skeptical about introducing negative interest rates to the United States. Other central banks including in Europe in Japan, have pushed rates below zero. “In my view, negative interest rates poorly position an economy to recover from a downturn,” Rosengren said.
In perfect timing the IMF just released a paper “How Can Interest Rates Be Negative?” in which they discuss the negative interest rate experiment. Note this chilling comment in their penultimate paragraph “But the concern remains about the limits to negative interest rate policies so long as cash exists as an alternative”. So, here clearly is the link between the ban of cash, and monetary policy – no conspiracy theory, – plain fact.
The European Central Bank introduced negative interest rates in 2014 and the Bank of Japan followed in 2016. The German 10-year was up 1.92% to minus 0.7144. It is within striking distance of its record low set last September near minus 74 bp. Now of course in Japan, the Central Bank there has been buying up a range of securities, including stocks, bonds, and frankly anything with value, as they take the rate negative. Two-year notes in Japan currently yield minus -0.28%.
If longer-dated U.S. Treasury yields hover near zero, some see a risk that a new wave of buying could turn shorter-dated ones negative, even without the Fed adopting a negative policy. So monetary policy madness prevails.
The CBOE Volatility Index, which measures the implied volatility of S&P 500 options, was up 5.86% to 41.94 a new 5-year high. This underscores the uncertainty in the markets.
Gold Futures for April delivery was up 0.38% to $1,674.35, so traders are placing their faith in the yellow metal, Gold jumped almost 7% on the week, its biggest weekly gain in 11 years. but elsewhere in commodities trading WTI crude oil fell 9.35% to hit $41.61 a barrel, after OPEC and Russia failed to come up with a deal expected to cut 1.5 million barrels per day off global supply
The US Dollar Index Futures was down 0.75% at 96.060 while the EUR/USD was up 0.40% to 1.1284.
Bitcoin was up 0.55% to 9,140, as more investors seek out places to store cash.
Investors lowered bearish bets on the Chinese yuan as a U.S. rate cut gave Chinese bonds a yield advantage. Aided by a weakening dollar, short positions on the Chinese yuan stood at their lowest since early January 2019. The yuan immediately jumped after the rate cut to its highest level since Jan. 23 and erased all losses it had clocked since the Lunar New Year holiday. It stood at 6.9373 at the close. The Shanghai index stood at 3,034.51, stronger than recently.
Weakness in consumption in Japan to start the year lends credence to ideas that the world’s third-largest economy is contracting for the second consecutive quarter. Household spending fell 3.9% year-over-year, nearly matching economists’ projections, after a 4.8% decline in December. It is the fourth straight decline. Durable goods have been especially hard hit, led by a 10.7% decline in January auto sales after an 11.1% decline in December. Some daily data suggest that after the school closures were announced in late February, there may have been some a surge in necessity purchases. Labor cash earnings rose 1.5% year-over-year after a 0.2% fall in December. Yet, details may not be as favorable as the optics. Base pay did accelerate, but the real action came from the 10.2% jump in bonuses. Lastly, the January leading economic indicator fell from 91.0 to 90.3, its lowest level since 2009. The Japanese market dropped to a six-month low, with 97% of shares on the Tokyo exchange’s main board in the red.
In London, Europe’s financial capital, the Canary Wharf district was unusually quiet. S&P Global’s large office stood empty after the company sent its 1,200 staff home, while HSBC asked around 100 people to work from home after a worker tested positive for the illness. The Footsie dropped a further 3.62% on Friday to 6,462, while the financials index fell 3.84% to 699.80 and the pound US Dollar rose 0.74% to 1.3049.
As I see things, the global uncertainty will hit hard and debt will be the centre of the storm. According to the Institute of International Finance, a trade group, the ratio of global debt to gross domestic product hit an all-time high of over 322 per cent in the third quarter of 2019, with total debt reaching close to US$253 trillion. Much of the debt build-up since the global financial crisis of 2007-08 has been in the non-bank corporate sector where the current disruption to supply chains and reduced global growth imply lower earnings and greater difficulty in servicing debt. In effect, the Panic Not 101 raises the extraordinary prospect of a credit crunch in a world of ultra-low and negative interest rates.
As the OECD puts it “In a downturn, some of the disproportionately large recent issuance of BBB bonds — the lowest investment grade category — could end up being downgraded. That would lead to big increases in borrowing costs because many investors are constrained by regulation or self-imposed restrictions from investing in non-investment grade bonds. The deterioration in bond quality is particularly striking in the $1.3tn global market for leveraged loans, which are loans arranged by syndicates of banks to companies that are heavily indebted or have weak credit ratings. Such loans are called leveraged because the ratio of the borrower’s debt to assets or earnings is well above industry norms. New issuance in this sector hit a record $788bn in 2017, higher than the peak of $762bn before the crisis. The US accounted for $564bn of that total. Much of this debt has financed mergers and acquisitions and stock buybacks. Executives have a powerful incentive to engage in buybacks despite very full valuations in the equity market because they boost earnings per share by shrinking the company’s equity capital and thus inflate performance related pay. Yet this financial engineering is a recipe for systematically weakening corporate balance sheets. Exactly. And more central bank liquidity actually will not help, indeed it expands debt even more. Perhaps we are approaching that Minsky moment. We will see.
So to the local market.
Of course, the RBA cut the cash rate this past week, in response to recent events putting the cash rate at a record-low 50 bp. Because the Fed cut more, in fact the Ozzie Doller is looking a little stronger, having dropped to record recent lows. It ended at 66.50, up 0.56%. That is a problem, in that the RBA needs to dollar to go lower, to help protect the local economy, and this may in fact signal they should have cut harder. But then again, with only 0.25% in the locker before practically speaking hitting zero bounds (because of the RBA’s rate corridor) they are caught now. We are now expecting a further “emergency” cut, and even QE in short order, to try to support the economy.
And if you want to understand why that support is needed, you should watch my recent show “The State of the Economy in ~ 10 Slides” There we discuss Australia’s retail sales which unexpectedly fell in January by 0.3% after the 0.7% decline at the end of last year. It is the first back-to-back decline in retail sales since July-August 2017. Weak wages, the peak of the wildfires, and high household debt levels are the likely culprits.
The Australian reported that Australia faces an “unprecedented” fall in international visitor arrivals from key countries as the Panic Not 101 outbreak feeds a record number of holiday cancellations and a 36 per cent fall in bookings since December. Tourism Australia data revealed a wipe-out in international airline bookings from key tourism markets, including China, Britain, Canada, the US, India, Japan and Singapore. The travel ban on China, Australia’s biggest tourism market with about 1.4 million international visitors each year, has triggered a paralysis in bookings and a flood of forward cancellations from Chinese tourists. Belatedly they are trying an advertising blitz in Europe and the USA, but too little too late.
S&P cut their growth forecast for Asia pacific to 4%, assuming what they call a U-shaped recovery, and they said that Australia is quite vulnerable, with growth in 2020 expected to touch 1.2%, well below trend. “Australia’s most-disrupted sectors employ a large share of workers which will weaken both the labor market and consumer confidence,” S&P said. Services account for almost 80% of employment with accommodation and catering, sensitive to tourism and discretionary consumer spending, alone making up over 7%. We expect the Reserve Bank of Australia to cut rates once more to 0.25%. Of course no-one can tell for how long the disruption will run. Our modelling suggests the Australian economy is on the verge of a six-month shut down. There won’t be much internal movement. The borders will remain closed, at first by us and then by everyone else as they recover, but we get sicker. The private sector will hunker down. And the public sector will enter a valiant struggle with the threat.
The ASX 100 dropped 2.8% to 5157.90, while the ASX financials dropped 4.8% to 5,397.60. Bank stock prices were hit hard this week. ANZ was down 4.73% to 22.14, as it announced further job cuts. CBA slipped 3.67% to 73.93, NAB dropped 5.22% to 22.075 and Westpac was down 4.04% to 21.35, and confirmed that John McFarland will take the Chair at the bank from 1st April. Regionals were crunched, with Bank of Queensland down 4.02% to 6.93, Suncorp down just 2.18% to 11.20 and Bendigo Bank down 8.15% to 7.78. Bendigo did a capital raising, recently and remains under pressure. Elsewhere AFG, the aggregator slid 7.08% to 2.23 and Macquarie fell 4.07% to 131.93.
Lower rates of course crush margins, and most lenders passed on the full 25 basis point cut to mortgage borrowers. They are busily trimming deposit rates further – savers once again a silent victim in all this. The RBA is of course are assuming that the banks can lend more as rates fall (to drive more consumption) but consumers and businesses are not confident at the moment, and household debt is very high. In addition, many deposit returns are already so close to zero that they cannot recover another 25 basis points. So net, net rate cuts are eating into bank profits, dividends will be lower, and risks of default are rising among consumers and businesses as the economy supply side shocks kick in. We think there are limited tools to support the market from here, and in fact, QE will not do much, when it comes. Welcome to a Japanisation of the economy.
Fitch reported little change in mortgage arrears in the last quarter of 2019, Australia’s 30+ days mortgage arrears were down 1bp to 1.06% in 4Q19 from the previous quarter, and 1bp higher from the year earlier; 30+ days arrears have now been below 1.2% for the past two and a half years. They make the point that the bushfires occurred in remote or regional areas with low population levels, while the mortgage portfolios typically securing RMBS notes are concentrated in densely populated areas that were not directly affected by the bushfires. The Panic Not 101 outbreak could indirectly affect arrears performance due to lower incomes stemming from a fall in tourist numbers following the implementation of travel restrictions.
Last Saturday we saw significant auction results, with 2,933 listed and 1,592 cleared according to Corelogic, giving a 77.1% weighted average clearance. Sydney was at 81% and Melbourne at 77%. A year ago there were 2,301 listed and 50.4% cleared.
Their home price index was up again, with weekly rises of 0.4% in Sydney, 0.3% in Melbourne and 0.12% in Adelaide. Perth managed a 0.08% rise and Brisbane just 0.06%. As a result, there are average quarterly rises of 4.55% in Sydney and 3.82% in Melbourne. From peak though Perth is down 21.0% and Sydney is still also in negative territory (before any inflation adjustments are applied). And again, these are averages, prices on the ground vary considerably, with many areas still lower than a year back. Rises are weighted towards more expensive property, which had dropped the most earlier.
Corelogic also said that Darwin home prices have fallen for 68 months and is 32.7% below its May 2014 peak. In inflation-adjusted terms, Darwin’s dwelling values have declined by around 36% from peak. Perth is the other housing market that is yet to stage any meaningful recovery, even though it rebounded marginally over the past quarter. Its dwelling values are still 21.0% below their June 2014, or around 27.0% lower in real terms.
They also reported in their quarterly rental report that annual rental growth nationally (1.3%) remains below inflation (1.8%), with national capital city rental growth (0.8%) even weaker. Sydney’s rental growth (0.5% QoQ; -0.6% YoY) remains especially weak, which pulled down rents nationally. While there are some variations across locations and between houses and units, property investors are in for a torrid time. Recent price growth in both Sydney and Melbourne against soft/negative rental growth has driven gross rental yields into the gutter, with both Sydney and Melbourne house yields well below 3% – near the lowest level on record. Net returns are even worse.
And SQM research released its Stock on Market report for February, which revealed that property listings rose by 0.2% over the month but were still down 13.8% year-on-year. But listings in Sydney and Melbourne bounced, jumping by 9.9% and 10.0% respectively in February. We think home prices will react to the recent uncertainty, and rising supply. It is just a timing issue.
The S&P/ASX 200 VIX, which measures the implied volatility of S&P/ASX 200 options, was up 20.47% to 26.687 a new 3-years high. Risk is on. The Euro Aussie Dollar was at 1.6973, the Aussie Gold cross was down 0.41% to 2,519.20 and the Aussie Bitcoin cross was down 0.26% to 13,812.9
So, in summary, the uncertainty in the outlook is looking decidedly dark. There are few places to hide, and the question now is how soon will property prices slide back – we are expecting some fiscal stimulus and it will be interesting to see if it is directed at the property sector – is should not be, as there are more immediate needs among small businesses, but then again the Government does appear to love property. We will see.
Domain released their preliminary results for today.
Volume is significantly down from last week – possibly a function of the Melbourne long weekend, or perhaps the hit of doubts regarding the Covid-19? Still higher than last year at this time.
Canberra listed 23 auctions, reported 15 and sold 11, with 1 withdrawn and 4 passed in to give a Domain clearance of 69%.
Brisbane listed 76 auctions, reported 43 and sold 26, with 1 withdrawn and 17 passed in to give a Domain clearance of 59%.
Adelaide listed 44 auctions, reported 29, and sold 22, with 2 withdrawn and 7 passed in.
