We’ve seen market volatility and the dislocation in markets continue through the early part of this week, particularly when we look at what’s occurring in offshore markets. The US market has been sold down relatively heavily over the last couple of days. From our perspective, as the economy starts to feel the impact of the coronavirus and the shutdowns that we’re seeing in the US, Europe and other parts of the world, it’s clearly having a meaningful impact on investor confidence and the sentiment going forward.
From a central bank point of view, we’re seeing central banks really become a lot more coordinated in their approach. The US Federal Bank has continued to provide support to the market, it announced further cuts to interest rates on Sunday US time or Monday morning our time, as well as additional economic packages in regards to providing additional stimulus and liquidity into the market, which remains the most important part of ensuring that markets can function in a stable manner. The US Fed Chairman, Jerome Powell, made a comment exactly of that nature – that they want to ensure that Treasury markets remain liquid and want to ensure that the funding side remained stable in what continues to be very challenging macro environment. We saw the ECB, the Bank of Japan, also follow suit.
So at the central bank level, we are clearly seeing signs of that support continuing to come through which is really important in terms of overall market confidence. In our view, locally the RBA will make an announcement in the latter part of this week and we expect another cut in in official interest rates. We also expect that the RBA will start to begin purchasing Treasury securities. So we expect quantitative easing in the Australian context with the RBA pushing as far as it can go in regards to interest rates. We don’t expect negative interest rates though, but they’ll be looking at all tools and mechanisms to provide liquidity and ensure that markets can function in a stable manner.
At a political level, the US is now starting to catch up to the realities that it’s facing, and we expect more to be done. Clearly, countries are going into lockdown at a greater pace and in our view, this is the most logical way to deal with it. Because if they can contain the spread of the virus and we can get to peak infection rates as quickly as possible, we think the impact on economies will be less. It’ll also enable those economies, as we head through the second part of the year, to benefit from what is going to be a very extensive fiscal and monetary response in order to maintain economic activity.
So as we sit here today, clearly, markets are remaining very challenged and we expect volatility to be high. It’s the highest it’s actually reached since 2008 and we don’t expect that to dissipate anytime soon. Clearly, that does cause concern for investors and increased worry when they see markets continuing to move lower. But, from our perspective, it’s about holding on the line and understanding the market that we’re currently in. We are seeing some more attractive opportunities open up every day and we’re thinking about how to position that accordingly. We are also clearly now seeing a more coordinated fiscal, political and monetary response from governments and central banks as well.
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Piers Bolger is Chief Investment Officer at Viridian Advisory
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