Market Update - March 2020

Walbrook Wealth ManagementMarch 13, 2020

The focus over the past month has been almost entirely on the coronavirus outbreak, the measures taken to contain it, and the potential economic fallout.

At this stage it is difficult to gauge the impact on Chinese and global growth, but so far the disruption caused to supply chains and the effect on confidence has been dramatic.

In response to the coronavirus outbreak and anticipated economic fallout, the US Federal Reserve made an emergency cut to the funds rate of 50 basis points – its biggest single cut since 2008 – bringing the rate to 1.25%.

Fed Chair Jerome Powell said: “The virus and the measures that are being taken to contain it will surely weigh on economic activity, both here and abroad, for some time.”

The virus is likely to have a significant effect on economic growth, coming at a time when the underlying economy is reasonably robust. GDP growth for the December quarter was an annualised 2.1%, which was in line with expectations, while inflation remained well under control. Payrolls growth surprised to the upside while consumer confidence was near record highs, in contrast to more sombre business confidence levels.

Although payrolls growth slowed in 2019 with an average 176,000 jobs added each month, down from 223,000 in 2018, 2020 started on a positive note with 225,000 jobs added. After rebounding in January, the ISM manufacturing index moderated from 50.9 to 50.1, just barely in expansion territory.

Eurozone GDP grew by less than 0.1% in the December quarter according to the flash estimate, marking the slowest rate since the recession in 2012-13.

Data showed GDP in Germany was essentially unchanged, while in France it shrank by just under 0.1% amid disruptions over pension reform. Over 2019, eurozone GDP grew by just under 1.0%, which was the slowest year-on-year growth rate since 2013, while industrial production in Germany fell 6.7%, down from the recent peak of growth of 6.5% at the end of 2017.

Headline inflation in the Eurozone picked up to 1.4% in January from 1.3%, but core inflation, excluding food and energy, fell to 1.1% from 1.3%. The coronavirus outbreak, along with the combination of flagging growth and sliding inflation, means the ECB is certain to cut rates and may also make changes to bank lending and increase the size of its bond-buying program.

The presidential election race is the other big news story, with the Democrats close to choosing a presidential candidate to take on Trump. Super Tuesday – the biggest voting day of the Democratic nomination process – saw Joe Biden firm as the favourite to win nomination.

After leaving the EU, the UK is now in the process of negotiating a trade deal with Europe. Prime Minister Johnson said he will not seek an extension if an agreement is not reached before the deadline of 31 December. The UK economy failed to grow in the December quarter following a modest 0.5% growth in the September quarter, as political uncertainty restrained business investment, consumer spending and manufacturing production.

At this stage it is difficult to gauge the exact impact of the coronavirus on Chinese and indeed global growth. Consensus forecasts for Chinese GDP growth in the current quarter are variable but could be close to zero given the extended closure of industry, restrictions on people movement, and the disruption caused to supply chains.

China Flights

While past epidemics like the SARS virus had a limited effect on global growth, the effect of the coronavirus epidemic is expected to be much greater given China’s dominant presence in the global economy. According to a Ministry of Industry and Information Technology spokesperson, only 30 percent of small and medium businesses nationwide have resumed work, while car sales have plunged 80% and passenger traffic is down 85%.

China accounts for 18% of global tourism spending (up from 4% in 2008) while overall tourism (domestic and global) spending accounts for more than 10% of Chinese GDP and has been contributing almost 1.5% to annual GDP growth.

Many international airlines have either stopped operating in or reduced flights to China, and some countries have closed their borders with China or denied entry to foreign nationals who have recently visited. Major overseas companies have highlighted the impact of supply chain disruptions curtailing production.

Oil markets have also seen plenty of action, moving lower in February and then taking a dive more recently as Saudi Arabia and Russia had a spectacular falling out over how best to manage global supply. Both are now engaged in a price war that is threatening US shale producers, some of which are highly leveraged.

The Brent oil spot price fell from US $56.52/b to $49.67 over the month, while WTI fell from $51.56 to $44.76 and has subsequently fallen to $33.69.


The Australian economy grew at 1.7% in the September quarter and most likely less than 2.0% in the December quarter, well below the growth rate required to lift wages and inflation and to keep unemployment from rising.

Unfortunately, the coronavirus and the policy response have come at a time when the Australian economy was showing signs of improvement and the budget was on a firm footing. There is a chance that the domestic economy will contract in the current quarter, prompting calls for fiscal stimulus.

In 2018, Australia’s exports of travel services to China amounted to $16.2 billion, of which $11.7 billion was education-related and $4.1 billion was classified as ‘other personal’. China accounts for 27% of total travel exports and 33% of education-related travel exports.

If the 60% of Chinese personal travel exports that typically occur in the March quarter were ‘banned’ and a third of education-related travel exports waived or delayed, there could be a $5–6 billion hole in Australia’s March quarter GDP (around 1.0% of quarterly GDP). Of course, this doesn’t take into account the negative multiplier effects on local employment and investment plans, nor the counterbalancing effects of fiscal measures and a lower Australian dollar.

The RBA expects GDP growth of 2.0% for 2019 and 2.7% for 2020, down from the 2.3% and 2.8% projected in the November 2019 Statement on Monetary Policy. These latest forecasts include preliminary assessments of the impact of both bushfires and the coronavirus, although they stressed the high degree of uncertainty around the latter.

January’s employment figures showed 20,000 jobs were added over the month, including 14,600 full-time (in seasonally adjusted terms). However, the unemployment rate moved upwards from 5.1% to 5.3% and has been edging higher over the past year due to a rise in the participation rate (more people entering the workforce).

As the RBA notes, an uptick in wages growth is critical for inflation to move to a sustainable footing, but spare capacity in the labour market means wage pressures are still low. The RBA has indicated that further rises in the unemployment rate may warrant further rate cuts, but the Bank has already taken action thanks to the coronavirus.

The AIG Manufacturing Index fell from 45.4 to 44.3 in February, its lowest result since hitting 44.2 in June 2015. Only the food and beverage sector was in expansion over the month, while production, sales, new orders, and export indices fell further into contraction.

Respondents to the Australian PMI said travel restrictions in response to Covid-19 were denting exports of Australian manufactured goods, particularly consumable items into China. Heavy manufacturing sectors like equipment, machinery and metals noticed supply chain disruptions in February due to factory and freight closures in China.

After a horror bushfire season that saw consumer confidence battered, the Westpac Melbourne Institute Index of Consumer Sentiment saw a pickup in mood, with the index rising from 93.4 to 95.5. The ‘economy, next 12 months’ sub-index rose 5.4% in February and the ‘economy, next 5 years’ sub-index rose 4.3%, both sub-indexes partially reversing the sharp falls seen over the previous two months.

How long this lasts with the coronavirus now dominating the headlines remains to be seen, while the effect of the RBA’s rate cut may not provide the traditional boost that it has in the past.


February saw heavy selling in local and global shares as markets priced in the risk of the coronavirus outbreak, which includes significant disruption to supply-chains due to lockdowns, travel restrictions and other efforts to contain the virus. Reporting season revealed a number of ASX companies have already been forced to make downward adjustments to guidance.

Global markets were rocked by the spread of the coronavirus as investors struggled to keep up with the flow of information and price in the potential economic damage. In the United States, the CBOE Volatility Index (VIX), known as the ‘fear gauge’, spiked to 49.5 points, its highest level since 2009.

In an extraordinary move, the Federal Reserve cut the funds rate by 50 basis points – its largest single move since 2008 – sparking a short-lived rally in equities, although selling quickly resumed as investors questioned the efficacy of monetary policy.

In Asia, Japan’s Nikkei 225 Index fell 8.8%, while China’s CSI 300 Index fell a more modest 1.6% over February on the hopes that authorities will continue to lower financing costs and possibly provide additional support.

Rates & Credit

Fears of significant disruption to global economic growth in the short-term led to investors to move into safe-haven assets including bonds, while policy responses from central banks pushed yields to record lows.

The yield on Australian 10-year Treasury bonds fell 13 basis points to 0.82% in February, and in the first week of March fell a further 8 points to 0.72%. Its US counterpart fell 36 basis points to 1.15% in February and since the start of 2020 has fallen from 1.92% to 0.91% (as at 5 March), a dramatic drop of 101 basis points.

At an unscheduled meeting, the US Fed made an emergency cut to the funds rate of half a percentage point in anticipation of the economic fallout.

Markets recognise that monetary policy alone is limited in what it can achieve in terms of preventing supply-side damage to the economy, but lower rates may help to support sentiment or buy time for governments to determine an appropriate fiscal response. Weak growth and slowing core inflation have seen the yields on 10-year German government bonds fall from -0.19% to -0.86% since the start of 2020. Most strikingly, Greek 10-year bonds were yielding less than 1.0% in mid-February, down from over 27% in mid-2012 and below that of Italian bonds.


The Australian dollar fell from US $0.6692 to $0.6515 in February, hitting an 11-year low. The dollar is down from $0.7024 at the start of 2020 and has endured bushfires, droughts, floods and now the coronavirus. This, along with a plunge in oil prices, saw flows move from riskier currencies like the Australian dollar to safer currencies like the Japanese yen.

Over the three months to the end of February 2020 the Australian dollar fell 3.7% against the US dollar, 3.8% against the euro, 5.0% against the Japanese yen and 2.9% against the British pound.


This article contains information first published by Lonsec. Voted Australia’s #1 Research House for 2019.

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