The Not So Daily Bulletin No. 334

Top Stories

Today, September 29 the ASX 200 was flat after the market was expecting a positive day, The index finished at 5952 which is up 76 points from the last Not So but still very much in the four-month trading range established in June.

Markets are looking for the next catalyst to break out of the range. At this point, the downside has the edge as he US election is only weeks away and no second stimulus package is likely. The virus is still rising in Europe and globally daily infections are near all-time highs which suggests very few countries have controlled it. We may not see another had lockdown but the recovery is likely to be slower than some were expecting, especially when WE DON’T HAVE A VACCINE yet and any widespread usage of a vaccine is looking like late 2021 and more likely 2022+. This means social distancing will be with us for a while.

In Australia, the lower COVID numbers are providing some optimism that we will soon be open domestically. On Tuesday we will see the government deliver another SPENDATHON (aka budget). Thankfully, low interest rates will remain for a number of years.

The Current Bet.

David Bassanese from Beta Shares posed the following scenario.

France and Spain re weathering a severe second wave, but as yet authorities remain reluctant to re-instigate the harsh shelter-in-place lockdowns seen earlier this year.

This now is the central issue for markets – will countries be able to endure return waves of COVID without full lockdown, which in turn will seem to depend on whether we get similar spikes in death and hospitalisation rates seen earlier this year (which so far is not the case).

If so, the fledgling global economic and equity market recovery can continue –

If not, we face the risk of ‘double dip’ recession, a more serious equity market correction, and yet more micro-stimulus.

Morgan Stanley’s Global Investment committee released their view on recent events.

Global policy makers deserve much credit for their successful ‘do whatever it takes’ approach to navigating the onset of the COVID-19 crisis. However, our current fragile economic recovery has come with substantial expectations, and misfires from here may come at a cost to the economy and to investors.

Recent disappointments from Congress and the Fed have contributed to the market correction. With uncertainty likely to remain high over the next 2-3 months and the unique circumstances of the presidential election likely to weigh on sentiment, we see stock market volatility persisting.

Watch for the VIX (currently at 26, normal is less than 17), a measure of stock marke volatility, to normalise.

Consider gold, inflation protection securities and cash for short term investors. Long-term investors should be opportunistic buyers in quality cyclicals and high yield credit.

Banking changes.

The banks have been facing many headwinds in recent years, and so it was a sensible surprise to see the treasurer announce changes to the bank lending requirements in a post COVID world.

The government is looking to repeal responsible lending obligations set out in the National Consumer Credit Protection Act. This is a commonsense approach which will lead to more lending and avoid a potential credit squeeze which is already facing borrowers in the pandemic recession.

Ords said it was an improvement in system loan growth would be positive, although there are limits to how much loan growth is desirable. We remain concerned about the impact of low-interest rates and mortgage competition on profitability in the mortgage market. Nonetheless, we recognise the potential signal that the government has become friendlier to the industry following the Royal Commission, and there remains good valuation support for the sector, with ANZ Banking Group (ANZ, Hold) Westpac Banking Corporation (WBC, Hold) and NAB all trading below book value. National Australia Bank (NAB,Accumulate) remains out preferred exposure among the major banks.

Post-COVID (left in from last update)

Bell Potter interviewed Magellan Chief Investment Officer – Hamish Douglass regarding the state of the markets. He made the following observations:

  • Markets have factored in a Vaccine cure coming soon. However, no one has proven they have one that works. He thinks markets are a little ahead of themselves.
  • The US Federal Reserve is going to keep interest rate low for an extended period.
  • Governments are going to continue to stimulate and increase liquidity which will support asset values.
  • Pandemic – the economic impact is not fully understood yet.
  • Markets will pay more attention to who wins the US Senate and not the White House. If the Democrats win a CLEAN SWEEP,m then markets may become jittery.
  • Their fund is currently holding more cash than usual and will look to invest it once a successful vaccine as been found.

Likely changes in a POST COVID world.

  • The massive uptake of video streaming during a pandemic is likely to be kept.
  • Interest rats are going to have a large effect then geopolitical risks (trade war etc) on asset values.
  • Digital cloud computing has forced people to learn and adopt.
  • Tap and Go, electronic payments and online shopping here to stay.
  • Social distancing and Hygiene will have an impact on some businesses.
  • Rents in some industries will reduce (retail, office etc)
  • Leisure travel will come back but maybe not business travel given the use of virtual meetings.
  • Working from home option as it saves travelling time.

Other Stories

  • Sports Bet – US Election Trump $2.01 ($2). Biden $1.75 ($1.80)
  • NY Times reported President Trump has paid little tax over the last 15 years and has $400M in debts falling due over the next 4 years. The questions is – Who does he owe money to?
  • The first debate is on tomorrow morning.
  • ASIC are warning about investment funds offering high income returns that seem to suggest they are ‘CASH LIKE’. ASIC found 37 funds managing $21bn has misused the term cash and this has seen a couple of funds associated with Mayfair Platinum go bust with over $200m of investor funds.
  • Amcor sell 47% of their HK businesses.

Other Indicators.

  • US VIX Index decreased from 28.58 to 26.19 Still above normal levels (10 – 17). Therefore more volatility likely.
  • Iron Ore increased from $113.81 to $116.15. Has fallen due to increased Brazilian production. A six-year high of $130.17
  • Copper increased from $2.95 to $2.98 Recent high of $3.10
  • Gold increased from $1855 to $1883. Record high $2063.
  • AUD/USD increased from 70.43c to 70.83c. Fell to a low of 65c. The future direction is more about the USD rather than the AUD.
  • USD/CNY remained at $6.82 the lowest point in many months is $6.75. China is becoming more comfortable with its recovery.
  • Asian markets mixed.
  • US 10 year Bonds decreased from 0.67% to 0.66% Hit a low of 0.31%
  • German Bonds increased from -0.50% to -0.52% Hit a low of -0.9%
  • Japanese Bonds increased from +0.009% to 0.02%
  • Aussie 10 years Bonds decreased from 0.87% to 0.84% Lowest point 0.68%
  • Other rates have slightly fallen. 1 year 0.12%, 2 year 0.18%, 4 year 0.25%, 5 yer 0.36%. The RBA is trying to maintain the short term rates at 0.25%. Rates have fallen over the last week which may suggest that markets may be expecting a rate cut next week.
  • Oil price increased from $39.42 to $40.32
  • Tungsten remained at $215 – $220 mtu.

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