The Monday Report – 16 March 2020

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This story features COCHLEAR LIMITED, and other companies.
For more info SHARE ANALYSIS: COH
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

7Eleven

The ASX200 fell -7% to lunchtime on Friday before rallying 11% in the afternoon, to close up 4.4%. You don’t see that every day. That’s -431 points down to close up 234. Did anyone manage to get on? I doubt it. Humans can’t move as fast as computers.

So what happened at lunchtime?

The Dow had posted its biggest one-day fall since 1987 on Thursday night following Trump’s shutting the border to Europe. Our futures closed down -383 on Friday morning, and that’s exactly where the index was within ten minutes of the open. A brief rebound attempt failed mid-morning.

Then House Democrat leader Nancy Pelosi announced a stimulus package deal was close to being agreed upon in Congress. It had only taken a week to that point. The US stock index futures turned and began to rally in US overnight trade. The Australian market has followed those futures movements to the letter throughout this episode.

Next the RBA announced it had injected $8.8bn into short term credit markets to stave off a tightening of liquidity. The Fed had taken the same action earlier in the week.

Then Scott Morrison advised that there should be no gatherings of 500 or more. I believe in the interim that advice has now become an actual ban. That’s when the NRL, AFL and others announced no more crowds, and many other non-sporting institutions followed. If the virus is to be stopped, such measures need to be taken. China gave the world the virus but has also shown how to beat it.

China announced 8 new virus cases on Friday. Italy reported 368 deaths in a day for a total of 1800. Spain reported a doubling of deaths to 288 in a day, before closing its borders. Germany has closed five of its nine borders. France has shut down bars and restaurants, as have the states of Ohio and Illinois.

Some countries have closed schools. China and South Korea showed the virus can be contained without closing schools, but then school holidays were underway at the critical time. In Australia, the jury’s still out, but one feels the day is approaching.

And that’s when the economy stops.

Is what we saw on Friday, which was mimicked on Wall Street on Friday night, the end? One has to assume the worst case economic scenario had been priced in when the ASX200 hit -32% down from its high at Friday lunchtime. That’s GFC stuff, and this is not a GFC. At least, it will not be a GFC if the virus can be contained. Only now, it seems, is the world starting to act.

It would be brave to call the bottom, but I think we might be able to see it from here. After a similarly stunning snap-back rally on Wall Street on Friday night, our futures closed up 61 points or 1.1%. Once upon a time that would be considered massive.

The biggest rebounds on Friday sector-wise came from healthcare (+10.6%), led by Cochlear ((COH)) this time (+21.1%), energy (+8.3%) and the two consumer sectors (+6% plus each). Utilities (-0.6%) saw the only selling, while industrials lagged (+2.0%) as Qantas ((QAN)) has now joined the staff underpayment club at an unfortunate juncture (-12.6%).

Materials (+2.6%) lagged as the gold miners were sold on a lower gold price, which is a lot lower again this morning, but things are on the move.

If global stock markets can hold their nerve today and tonight, it would be a good sign. For it is difficult to see what might trigger another sell-off given the news is about as bad as it should get. Mind you, Trump has finally agreed to be tested, but not Morrison. He’s bulletproof apparently.

Emergency

The virus that Trump once called a “hoax” led on Friday night to the president declaring a state of emergency.

As noted, US stock futures had begun to rally on Nancy Pelosi’s announcement a stimulus deal is “close”, and indeed the Dow opened up 1300 points. But as two years of trade war had taught us, deals can be “close” for weeks and months.

Does anyone remember the trade war?

Thus when nothing more was forthcoming, Wall Street lost faith and indices traded back down towards square on the day. Another rally attempt was made, but wasn’t until the last half hour that the circus started.

As well as officially declaring the state of emergency at that time, which releases US$50bn in natural disaster funds, Trump dragged onto the Rose Garden the CEOs of a number of US corporates, from Walmart and Target to Walgreens and Roche and on to lesser-known but relevant biotechs and medical service providers. Having been heavily criticised for moving too slowly to that point, as Italy had done, the administration capitulated and called in the private sector troops to significantly up the ante on testing and test kits.

The computers did the rest, with an emphasis on short-covering. While it may have been the biggest one-day rally on Wall Street since 2008, the bulk of the move being in half an hour had heads spinning.

And in breaking news, literally as I write, the Fed has not waited until Wednesday to announce it has cut its cash rate to zero and reintroduced US$700bn of QE.

On Friday night the Bank of Canada made an emergency cut of -50 points to 0.75% and the government announced a stimulus package.

The situation is clearly very fluid. Today’s trade, and tonight’s, will be telling.

Commodities

To that end I notice the Aussie is currently bouncing hard off its lows. On a 1.6% rally in the US dollar index on Friday night, the Aussie had fallen to US$0.6148, down -1.9%. As I look at the screen it’s back at US$0.6268 with a bullet.

Hence the gold price fall on Friday night, which was the highlight among commodities, may well reverse today in Asian trade.

I won’t thus say anymore, as everything keeps changing.

The SPI futures did nevertheless close up 61 points or 1.1% on Saturday morning.

The Week Ahead

Is there any point?

The Fed meeting this week was to take centre stage, but the cat’s already out of the bag.

The minutes of the March RBA meeting are due tomorrow, but probably meaningless, particularly if we see another emergency announcement.

China releases February industrial production, retail sales and fixed income asset data today and these will tell a sorry tale, but perhaps one that will mark the bottom. All other economic releases this week, local and global, are pretty much old news.

The Bank of Japan meets on Thursday, unless it, too, acts beforehand.

Thursday is the expiry of March quarter ASX derivatives, including the SPI and index options. On the option front I’d wager the bulk of positions are so far away from the money the usual volatility risk is much lower, but then how would you tell at the moment?

Quarterly S&P/ASX index changes are set to be announced this Friday, if they choose to go ahead.

Synlait Milk ((SM1)) reports earnings on Thursday and Premier Investments ((PMV)) on Friday.

The Australian share market over the past thirty days…

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