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Natasha Rudra

Australian shares are set to open higher as markets calmed after a wild week.

ASX futures were up 82 points or 1.6 per cent to 5298. The Australian dollar was up 0.2 per cent to 63.85 US cents.

Shane Oliver from AMP Capital says that March quarter CPI inflation data coming up this week is expected to fall 0.1 per cent quarter on quarter. “Prices for clothing and household equipment will likely also fall but food prices likely rose amidst the bushfires, drought and panic buying so underlying inflation is likely to come in around 0.3 per cent quarter on quarter or 1.5 per cent year on year,” he writes.

“Like all developed countries the hit to domestic demand will weaken our imports, but our relatively high exposure to the Chinese economy which now looks to be growing again and is looking to make up for lost activity by boosting infrastructure spending should help support our exports.

“And this is consistent with the price for our biggest export, iron ore, remaining relatively high at around $US84/tonne, while the price of oil [which we import] has crashed. All of which combined with a far superior policy response in Australia to the crisis could see the Australian economy as a relative outperformer over the next 12 months.”

Next week is scheduled to be one of the busiest of the US earnings reporting season, with more than 150 companies in the S&P 500 scheduled to report. But many companies in recent weeks have pulled their profit forecasts entirely for 2020, and Wall Street analysts are slashing their own estimates.


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Stephen Innes from writes that on the data side, “the first peek at Q1 GDP for the US and the Euro Area will provide investors the dreaded reality check to the extent of the initial drops in output, while PMI releases and the weekly US jobless claims will be carefully analysed for more recent developments as the data becomes more time accurate.”

The US Federal Reserve meets on Wednesday and economists in a Bloomberg survey say the Fed may hold interest rates near zero for three or more years, and its balance sheet will soar above $US10 trillion as policymakers seek to revive the US economy from recession.

Just over half the 31 respondents to an April 20-23 poll predicted the target range for the federal funds rate, now at 0-0.25 per cent, won’t move up until at least 2023. Another 22 per cent said not before 2022.

But economist and former Minneapolis Fed Narayana Kocherlakota takes it further – and suggests the central should go negative. “If the central really cares about financial stability, it has many tools to ensure it. Right now, for example, it could block large banks from paying dividends, a practice that erodes the capital they need to absorb losses. None of this precludes a monetary policy focused on the Fed’s congressional mandate of maximising employment and keeping inflation near target,” he writes.

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“So, the Fed is left no good argument against going negative. Terrifyingly high unemployment and potentially rapid disinflation are powerful arguments in favour. Next week, the Fed should take interest rates at least a quarter percentage point below zero.”

Today’s agenda

Local: none

Overseas data: US manufacturing index; China industrial profits March

Market highlights

ASX futures up 82 points or 1.6 per cent to 5298 at 12.17am Sunday AEDT

  • AUD +0.2% to 63.85 US cents
  • On Wall St: Dow +1.1% S&P 500 +1.4% Nasdaq +1.6%
  • In New York: BHP +1.9% Rio +1% Atlassian +2%
  • In Europe: Stoxx 50 -1.5% FTSE -1.3% DAX -1.7% CAC -1.3%
  • Spot gold unchanged to $US1729.60 an ounce
  • Brent crude +0.5% to $US21.44 a barrel
  • US oil +2.7% to $US16.94 a barrel
  • Iron ore -0.1% to $US84.35 a tonne
  • Dalian iron ore -0.4% to 607 yuan
  • LME aluminium +0.5% to $US1518 a tonne
  • LME copper -0.3% to $US5143 a tonne
  • 10-year yield: US 0.60% Australia 0.87% Germany -0.48%

From today’s Financial Review

China boycott looms over Morrison’s coronavirus probe: China’s envoy in Australia says the Morrison government risks economic repercussions over ‘politically motivated’ calls for an inquiry into the virus outbreak.

ACCC boss says Virgin Mark II needs to be full service: The competition regulator will be on high alert for any attempt by Qantas to squash a reborn Virgin in the early stages.

COVIDSafe app will help lead the way to recovery: The federal government’s new COVIDSafe phone app will help give authorities a head start in stopping any further outbreaks or clusters of the coronavirus, according to Health Minister Greg Hunt.

The S&P 500 glided to a gain of 1.4 per cent, with Apple, Microsoft and other technology stocks leading the way. The bond market was quiet, while crude prices climbed again.

The gains offered a soothing coda for a wild week, which began with Monday’s astonishing plummet for oil and carried through Thursday’s sudden disappearance of a morning stock rally, as markets pinballed from fear to hope and back again.

The S&P 500 still lost 1.3 per cent for the week as worries about the economic damage dealt by the coronavirus outbreak outweighed hopes that businesses could soon reopen. That snapped the first two-week winning streak for the S&P 500 since it began selling off in February.

Many investors fear cash-strapped companies will issue secondary stock offerings, diluting value. But lower interest rates will also come into play. “If yields stay where they are, I think debt looks much, much cheaper than equity. If you see a lot of equity issuance, you’d be looking at some of the over-levered parts of the US equity market,” said Michael Shaoul, chief executive officer at Marketfield Asset Management.

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Shaoul said that if a big slug of supply were to hit the market, it would probably come when the market was rallying and reflect companies shoring up their balance sheets and earnings power. “And then it’s kind of a happy story,” he said.

Europe

The FTSE racked up losses for the second consecutive week on Friday andended 1.3 per cent lower, logging a 0.6 per cent decline for the week. Shares of and Royal Dutch Shell were down nearly 3 per cent. Major European lenders including HSBC and Standard Chartered report results next week where the borrowers are expected to post a sharp rise in provisions against bad loans as they struggle amid the economic downturn. The pan-European STOXX 600 index lost 1.10 per cent but Swiss food manufacturer Nestle gained 1.5 per cent after reporting its fastest sales growth since 2015 as consumers loaded up on frozen food.

BofA Global Research said it expected STOXX 600 to gain a further 20 per cent and hit 400 points by August, while business activity sentiment in the region could rise back to above 50 by the third quarter.

The Bank of England has launched an unprecedented package of measures to support the U.K. economy and prevent long-term economic harm from the coronavirus outbreak, Governor Andrew Bailey said in an editorial in The Sun newspaper on Saturday.

Bailey said in the column that the measures will help to keep companies running and people working as the bank seeks to provide monetary and financial stability.

“In this way, the Bank can help prevent coronavirus from causing long-lasting economic harm to Britain,” he wrote.

The bank has cut the interest rate to a record 0.1 per cent, is injecting £200 billion ($247 billion) into the economy to lower long-term borrowing costs, is supporting businesses’ access to cash and will continue to lend to households and companies, Bailey wrote in the newspaper.

Asia

The Hang Seng index fell 0.6 per cent ’s Nikkei 225 fell 0.9 per cent, South Korea’s Kospi lost 1.3 per cent.

Corporate earnings of Hong Kong listed companies were generally worse than expected, which could dampen the room for a valuations recovery in Hong Kong equities, brokerage Cinda International noted in a report.

Investors need to pay attention to the implementation China’s fiscal and monetary policies, as boosting domestic demand would become a policy focus given the uncertain global economic outlook, the brokerage added.

Currencies

Shane Oliver from AMP Capital sees the hit to global growth from COVID-19 still risks pushing the Australian dollar lower in the short term. “But expect a strong rebound once the threat from coronavirus recedes, particularly with the US expanding its money supply far more than Australia is via quantitative easing and with China’s earlier recovery likely to boost demand for Australian raw materials,” he writes.

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The US dollar eased and the euro was up 0.16 per cent on Friday at $1.0793. For the week, the dollar remains about 0.7 per cent higher against the euro, set for its biggest weekly rise in three weeks.

Currencies of oil-exporting countries looked set to finish the week with losses. For the week, the Norwegian crown was down about 3 per cent and the Mexican peso was down about 6 per cent. Sterling was 0.14 per cent higher.

Ratings agency Standard & Poor’s left Britain’s credit rating unchanged on Friday, keeping it at “AA”. S&P’s decision contrasted with last month’s downgrade by rival Fitch.

Canada’s currency will depreciate sharply to 60 US cents and its credit rating will suffer as the federal government is forced to “backstop everyone,” rolling out more assistance for provinces, companies and households, according to economist David Rosenberg.

The country is “likely facing a series of downgrades” to its AAA rating, given that the total debt in the economy is already an unprecedented 350 per cent of GDP, he said. In the Group of Seven, only Canada and Germany have the highest rating.

Commodities

Holdings of the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, rose to a near seven-year high, while gold in euros hit an all-time peak of €1612.39 per ounce.

“Gold continues to benefit from this big mix of stimulus that was seen from all over the world. Also the expectations are pretty high that we are not near the end of the stimulus [driven] trade and it is only going to intensify in coming months,” said Edward Moya, a senior market analyst at broker OANDA.

Saudi Aramco started reducing production earlier this week ahead of the May 1 deadline when new OPEC+ output targets kick in, according to a Saudi familiar with the matter.

Aramco started to reduce production from about 12 million barrels a day to achieve the new level of 8.5 million barrels a day, the same person said, asking not to be named discussing non-public information.

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    Natasha Rudra is an online editor at The Australian Financial Review based in London. She was previously life and entertainment editor at The Canberra Times. Connect with Natasha on Twitter. Email Natasha at [email protected]

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