Shock And Awe – The Property Imperative Daily 16 March 2020

Welcome to our latest post covering finance and property news with a distinctively Australian flavour. Given the current market gyrations, we are going to examine the latest critical data each day, because a week is a long time in politics but a lifetime on the markets at the moment…

March Live Q&A:

RBA Says “More On Thursday”

As Australia’s financial system adjusts to the coronavirus (COVID-19), financial regulators and the Australian Government are working closely together to help ensure that Australia’s financial markets continue to operate effectively and that credit is available to households and businesses. (Refer to earlier Council of Financial Regulators’ (CFR) press release.) Australia’s financial system is resilient and it is well placed to deal with the effects of the coronavirus. At the same time, trading liquidity has deteriorated in some markets.

In response, the Reserve Bank stands ready to purchase Australian government bonds in the secondary market to support the smooth functioning of that market, which is a key pricing benchmark for the Australian financial system. The Bank will also be conducting one-month and three-month repo operations in its daily market operations until further notice to provide liquidity to Australian financial markets. In addition the Bank will conduct longer term repo operations of six-months maturity or longer at least weekly, as long as market conditions warrant. The Reserve Bank and the AOFM are in close liaison in monitoring market conditions and supporting continued functioning of the market.

The Bank will announce further policy measures to support the Australian economy on Thursday.

DFA is expecting a 0.25% rate cut, and formal QE to go alongside the repo operations already in train.

Fed’s Firepower Pulls Bond Rates Lower; For Now

Understand that the Fed’s actions (and other central banks actually) are NOT about supporting stock prices – as they are determined more by prospective future cash flows from business operations than anything else. There is a lot of rubbish in the media on this point.

But bond rates are another matter. Given the hike in bond rates we saw last week – which translates to higher interest bills, and funding issues, the T10 and 3 Month US rates dropped after the announcement. T10 was down 24%

The 3 month dropped 50%.

Question is, will this be enough – we think not. Watch for more action to try to control rates.

Aussie bonds also came down, with the 10 year down 13% and the 2 year down 20%.

S&P 500 Futures Drops 5%; Hits Limit

Chair Jerome Powell’s announcement this morning has spooked the US markets, with the futures price falling 5% and activating a trading halt.

The raft of announcements, which we have already covered has scared the markets, and it suggest a weak opening in the US later.

There are severe cracks opening up in the financial system, with treasury pricing haywire, the Feds initial massive repo sale under-subscribed, and direct liquidity support ineffective. Of course they want to shore up the financial markets, and he was at pains in the press conference (telephone) to underscore how well capitalised the banks are, and that negative rates are not coming.

Worth also noting the FED slashed the Interest on Excess Reserves that it pays the banks for parking their cash at the Fed to 0.10% effective Monday. Back in the heady days of 2019, the Fed paid the banks $34 billion in interest on reserves. This income just went away.

US Bank shares are under pressure. Here in Australia the Financials Sector Index is down around 4%, but rising from opening lows.

ASX Falls On Opening

The market was 4% lower on opening today, despite the various actions from central banks and other regulatory agencies. We will see how things develop later as other markets open.

Jerome Powell Fed chair has been underscoring the resilience of the financial systems and the power of the tools available, though said the under-subscribed repo strategy they executed last week showed they needed to purchase securities direct but given the market reaction, they then needed to act aggressively to support liquidity beyond that. Hence the rate cut decision.

Council of Financial Regulators On Covid-19 – Liquidity Taps Are On…

As Australia’s financial system adjusts to the coronavirus (COVID-19), financial regulators and the Australian Government are working closely together to help ensure that Australia’s financial markets continue to operate effectively and that credit is available to households and businesses.

Australia’s financial system is resilient and it is well placed to deal with the effects of COVID-19. The banking system is well capitalised and is in a strong liquidity position. Substantial financial buffers are available to be drawn down if required to support the economy.

The funding position of the banking system is strong. Australia’s financial institutions, market participants and market infrastructure providers have undertaken substantial investments in their operational capability to deal with the effects of the virus. At the same time, trading liquidity has deteriorated in some markets and financial institutions are having to adjust to a more volatile environment. The financial regulators are in regular contact with financial institutions, market participants and market infrastructure providers.

The RBA is continuing to support the liquidity of the system. As part of this support it will be conducting one-month and three-month repurchase (repo) operations until further notice. In addition it will conduct repo operations of six-months maturity or longer at least weekly, as long as market conditions warrant. The Australian Prudential Regulation Authority (APRA) is ensuring banking institutions pre-position themselves to take advantage of the RBA’s supportive measures.

Given the disruption being caused by COVID-19, Council members are examining how the timing of regulatory initiatives might be adjusted to allow financial institutions to concentrate on their businesses and assist their customers.

APRA and ASIC acknowledge the importance of the continued flow of credit to affected customers and industries in the current environment. Banks and other lenders are therefore encouraged to work constructively with affected customers during any period of disruption. For their part, APRA and ASIC will take account of the circumstances in which lenders, acting reasonably, are currently operating during the prevailing circumstances when administering their respective laws and regulations. Both agencies also stand ready to deal with problems firms may encounter in complying with the law due to the impact of COVID-19 through a facilitative and constructive approach. In particular, each agency will, where warranted, provide relief or waivers from regulatory requirements. This includes requirements on listed companies associated with secondary capital raisings, annual general meetings and audits. ASIC will also work with financial institutions to further accelerate the payment of outstanding remediation to customers as soon as possible.

The Council is meeting with major lenders later this week to discuss how they can best support households and businesses through this challenging period. The Council will be emphasising the importance of a continuing supply of credit, particularly to small businesses. It will be also discussing with the lenders whether there are impediments to lending that Council members could help to address.

The members of the Council of Financial Regulators remain in close contact with one another and with the Australian Government and their international peers. The Council will have its regular quarterly meeting on Friday 20 March at which the impact of COVID-19 on the financial system will be further discussed. The Council and the Australian Treasurer are also holding teleconferences at least weekly.

Council of Financial Regulators

The Council of Financial Regulators (the Council) is the coordinating body for Australia’s main financial regulatory agencies. There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers. Those powers reside with its members. The Council’s objectives are to promote stability of the Australian financial system and support effective and efficient regulation by Australia’s financial regulatory agencies. In doing so, the Council recognises the benefits of a competitive, efficient and fair financial system. The Council operates as a forum for cooperation and coordination among member agencies. It meets each quarter, or more often if required.

U.S. Banks Suspend Share Buybacks

Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley, State Street, and Wells Fargo, in a statement via the Financial Services Forum, agreed to temporarily suspend share buybacks for the remainder of 1Q and through 2Q 2020.

“The decision on buybacks is consistent with our collective objective to use our significant capital and liquidity to provide maximum support to individuals, small businesses, and the broader economy through lending and other important services,” the group wrote, citing the COVID-19 pandemic as an “unprecedented challenge”