Cover up | BetaShares

Cover up

BY David Bassanese | 20 July 2020

Global markets

Global equities eked out further gains last week, largely reflecting more vaccine hopes, good JP Morgan earnings and general relief that more widespread lockdowns were not re-imposed in the United States. Indeed, the tech-heavy NASDAQ actually slipped back last week while the S&P 500 gained, with a modest rotation into smalls caps and ‘value’ stocks.

The S&P 500 ended the week at the top end of its 3,000-3,200 range since early July – to be down, unbelievably, only 4.7% from its mid-February all-time high. The obvious question this week is whether the market can break out or is pushed back into its range. The U.S. Q2 earnings reporting season rolls on this week, with 75 S&P 500 companies reporting, including IBM and Microsoft (day-trader plaything Tesla also reports on Wednesday!). We also get July PMI reports on manufacturing and services on Friday.

To my mind, however, the market is still of a view to dismiss most earnings and economic data weakness as ‘old news’ – neither the failure of U.S. weekly jobless claims to fall last week, nor the pullback in consumer sentiment caused much of a ripple. Meanwhile, the market is quick to seize on any glimmer of good news – such as more hopeful vaccine trials or any U.S. corporation managing to report earnings slightly less horrible than expected. Also helping is the fact that bad news likely means the Fed will stimulate even further, with growing talk of the U.S. central bank promising to keep interest rates very low for a very long time.

Indeed, the only factor that seems capable of upsetting the market is lockdown news. In this regard, California imposed further restrictions last week, but stopped short of another full lockdown. And some U.S. states – with even worse virus breakouts – appear to be trialing greater use of face masks in public, as a mean of avoiding lock downs. Maybe face masks (which experts increasingly concede appear capable of at least slowing virus spread) could be a lockdown-avoiding game changer until such time as a vaccine arrives?

All up, even more important than earnings and economic data, how the virus continues to play out in America – and State/local government responses – remains the most critical factor for markets over the coming week.

Australian market

Local equities also managed to bounce last week despite Melbourne’s virus outbreak continuing to escalate. Local economic data was mixed, with a further encouraging rebound in employment over June as a whole (although the unemployment rate rose from 7.1% to 7.4% as more people re-entered the labour force) and a lift in the NAB measure of business conditions. That said, consumer confidence slipped back and the official fortnightly job tracker hinted the employment rebound may have stalled in the last two weeks of June.

The $A edged higher last week, helped by further gains in iron-ore prices as Chinese GDP data confirmed a solid Q2 economic bounce back. That said, Chinese retail spending for the month of June disappointed, highlighting the fact the world’s second largest economy is relying on good old-fashioned State-directed industrial projects rather than consumer spending.

The highlight this week will be the Federal Government’s budget update on Thursday, although some details of the extension of the JobKeeper program were released this morning. What’s clear is that Australia won’t face the ‘fiscal cliff’ that many fear, though somewhat less generous support will be likely in coming months – both due to budget concerns and to encourage those better-positioned businesses and workers to learn to walk on their own two feet again as early as possible.

Most critical of all, however, will be the the virus situation in NSW – and in particular whether it gets bad enough to force greater restrictions.

Have a great week!

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  1. Don Pridmore  |  July 21, 2020

    Hi David
    I have found your commentary to be amongst the most insightful of the endless views on financial markets being put forward at the moment. I especially like how your comments are supported by graphs of data which I don’t see elsewhere.
    Would you mind putting together in your normal insightful manner a description of how money passes between the government, the reserve bank, banks, holders of government bonds and any other players? A description of how modern money theory and conventional economic theory differ in the context of these institutions.
    Thanks for considering this request.

    1. David Bassanese  |  August 3, 2020

      Hi Don

      Thanks for your feedback. I might consider this for a future blog but in short for the present, government borrowing is really meant to mop up the extra cash that a budget deficit (spending greater than tax receipts) pushes into the economy. The Government must borrow as it can’t create it’s own money per se..its net spending creates a deficit in its account with the RBA which must be offset with cash from borrowing money through the issue of bonds. The RBA can in effect increase the money supply or “cash” in the system by buying bonds from the private sector and giving them cash in exchange. So if the RBA effectively buys the bonds that the Government issues to the public it is a form of money printing to fund deficits, but in a round about way. The Government still has a square position with the RBA but the RBA balance sheet has expanded by both creating cash (new liabilities) and using this to buy financial assets such as bonds. MMT thinks that the RBA can simply do this.. ie deficits can be financed by money printing .. without causing inflation due to excess spare economic capacity. Conventional policy I think agrees up to a point, but the problem (IMHO) is the precedent set by doing this as it could lead to larger deficits and money printing over time even in good times.. which could be very inflationary. MMT assumes away this real world problems by just assuming the policy will be used cautiously and only as required.

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