Macro Catalysts Driving Volatility in the Australian Share Market

  • Apr 02, 2020 AEDT
  • Team Kalkine
Macro Catalysts Driving Volatility in the Australian Share Market

We have finally bid goodbye to one of the most volatile quarters for the Australian equity market, the March quarter 2020, which continued to keep investors on the edge of their seats with its unexpected surprises. From observing its record-high level of 7162.5 points on 20th February 2020 to bottoming-out at 4546 points on 23rd March 2020, the S&P/ASX 200 index has experienced it all in the last quarter.

It goes without saying that the erratic performance of the Australian equity market was driven by the escalating spread of coronavirus pandemic across the world. The number of coronavirus infected patients have reached near a million mark worldwide, with about 47,000 deaths as on 2nd April 2020.

Although China (the epicentre of COVID-19) has begun to experience sharp and consistent recoveries, with a massive decline in the number of new cases, the US is bearing the brunt of fresh coronavirus cases across the globe. The world’s largest economy has so far reported over 200,000 coronavirus confirmed cases with more than 5,000 deaths, surpassing China with ~82,000 confirmed cases and ~3,300 deaths.

In fact, the S&P/ASX 200 has again caused a stir since the beginning of this week, exhibiting huge market volatility amidst COVID-19 pandemic. Let’s have a look at the benchmark index’s performance in this week so far:

After posting a rise of 7 per cent on Monday, the S&P/ASX 200 index slid by 2 per cent on Tuesday, driven by huge selling pressure in the equity market. Though the index reached as high as 5366 points in Tuesday’s morning session, it fell considerably by the end of trading session, capping off March 2020 quarter as the worst quarter since Q4 1987. Continuing its oscillating movement, the index again turned the tables on Wednesday while failed to retain its upward momentum and plummeted on Thursday.

Undoubtedly, the S&P/ASX 200 is experiencing pendulum swings this week.

In this backdrop, let’s discuss some macro catalysts that have been driving volatility in the Australian equity market:

Federal Government’s $130 Billion JobKeeper Package

The JobKeeper package announced by the federal government gave the strongest bounce to the S&P/ASX 200 index on Monday. The Australian PM, Mr Scott Morrison declared its $130 billion JobKeeper package early this week to support Australians in jobs as they deal with massive economic effect from the coronavirus.

Under the package, the government decided to provide a wage subsidy to about 6 million employees, who will get a flat sum of $1,500 each via their employer per fortnight. The government has opened the package for the businesses that have faced a huge financial hit from COVID-19, particularly those experiencing a fall of 30 per cent or more in revenue since 1st March 2020.

Mr Morrison mentioned that this JobKeeper package would bring the federal government’s aggregate economic support to around 16.4 per cent of the GDP or $320 billion.

Economists have lauded the Morrison Government’s wage subsidy package, expecting it to prevent an anticipated surge in the unemployment rate. However, they believe this package might risk the nation’s AAA rating. Calling the government’s stimulus package as incredible, an economist at Commonwealth Bank of Australia (ASX:CBA) recently commented that though the package will supercharge the economic recovery, Australia’s AAA rating will be lost now.

RBA’s Intervention in Government Bond Market

In an effort to prevent the Australian economy heading into recession, the RBA has recently marked its entry into the government bond market. Besides reducing the interest rates to a record low level of 0.25 per cent, the central bank has kickstarted the quantitative easing program in the nation, with a commitment to purchase unlimited quantity of government bonds in the secondary market to maintain three-year yields at ~0.25%.

So far, the central bank has purchased over $20 billion worth of government bonds in the secondary market via daily auctions that commenced on 20th March 2020.

Besides introducing quantitative easing for the first time in Australia, the central bank has also created a lending facility worth $90 billion to banks for SMEs, in addition to the $15 billion loan scheme declared by the Australian government for small and medium lenders recently.

China’s PMI Numbers

China’s National Bureau of Statistics reported the nation’s official manufacturing purchasing managers' index (PMI) at 52.0 for March 2020 this week against market expectation of 45. The official PMI demonstrated a considerable improvement from 35.7 in February 2020 to 52 in the consecutive month.

Though China’s official PMI figures were well ahead of expectations in March 2020, market analysts do not anticipate a durable economic recovery in the near-term. In fact, economists are expecting a steep contraction in the nation’s first quarter GDP.

OECD’s Australian Economy Outlook

The OECD expects the spread of coronavirus pandemic to wipe off 22 per cent from Australia’s economic growth in the near term. The weaker outlook for the nation’s economy has been provided considering high costs imposed by the public health measures to contain the spread of virus.

However, the organisation also highlighted that Australia’s high exposure to agriculture and mining activity can possibly shield it from worst of the downturn.

In addition to Australia, the OECD anticipates all its member nations to bear the brunt of a widespread shutdown being levied across the world. The organisation also expects a maximum hit to the output in professional and real estate services, and wholesale and retail trade in all the economies.

It is imperative to note that these macro catalysts partially induced the performance of the equity market this week; however, there were several other micro catalysts at work too, such as individual companies’ responses to COVID-19 pandemic. Similar such catalysts needs to be closely monitored in near term to analyse the global economic scenario.

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There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.

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