Market Wrap February 2020

Markets

Market Performance – The ASX200 experienced a decline of 7.7% over the month of February. The market has fallen an additional 13.4% since the end of February. This was sparked by fears of the coronavirus and its effect on global growth.
Sector Performance – All sectors of the ASX200 ended the month of February in the red. The Information Technology, Energy and Materials Sectors declined more than 10%, the Utilities Sector declined the least, falling 3.6%.
Banks – All the big 4 banks fell during the month of February, Westpac fell 5.9%, CBA fell 4.1%, ANZ fell 3.6% and NAB fell 2.9%.
Global – The S&P500 fell 8.5% in February. The Shanghai Composite Index also fell 3.2%.

Property

House Prices – Monthly national housing prices rose 0.9% in February. Sydney and Melbourne rose 1.1% and 1.2% respectively over the month of February.
Auctions – The last week of February saw 2,933 homes taken to auction nationally. The preliminary auction clearance rate came to 77.1%. A higher volume than the previous week where 2,517 auctions were held. Over the same time last year, across the combined capitals, 2,201 auctions were held with only a 50.4% success rate.
Rental Yields – Sydney recorded the lowest rental yields at 3.0% and the highest were in Darwin at 5.8% over the past 3 months.

Economy

Interest Rates – The RBA cut interest rates to 0.50% on 3^rd March 2020.
Gross Domestic Product – GDP growth in the December fourth quarter was up 0.5%, drawing annual GDP growth to 2.2% prior to the coronavirus and bushfire crises.
Bond Yield – The Australian 10-year Government bond yield fell over the month of February to 0.82%.
Consumer Confidence Index – According to the Westpac Melbourne Institute the Consumer Confidence Index rose 2.3% in February, compared to a 1.8% fall in January.
Employment – Employment increased by 13,500 jobs in January. The unemployment rate rose to 5.3% in January. The participation rate rose slightly to 66.1%.
Exchange Rates – The Australian Dollar fell against the US Dollar to $0.645 over February.
US – US jobs growth increased by 225,000 in January. The unemployment rate rose slightly to 3.6%. The US Federal Reserve cut interest rates by an unexpected 0.50% to 1.25%, down from 1.75%.
PMI – The Manufacturing Purchasing Managers’ Index rose to 50.9 in January from 47.8 in December.
China – Chinese car sales dropped 92% in the first half of February and was down 22% over January. China PMI also collapsed from 50 to 35.7, worse than GFC levels.

Sources: UBS, Westpac, S&P Dow Jones Indices, ABS, US BLS, CoreLogic, BIS Oxford Economics.

Comment – Oil Price War

At last Friday’s Organisation of the Petroleum Exporting Countries (OPEC) meeting, Saudi Arabia and Russia could not come to an agreement on supply restrictions, which sparked fears of an all-out price war. The Saudis had proposed a cut in production of 1.5 million barrels per day, to try and deal with the current supply glut. Russia is believed to have rejected the production cut as they saw an opportunity to hurt the US shale producers who had been benefiting from the OPEC restrictions and contributing to the market glut.

After an agreement couldn’t be reached, Saudi Arabia increased its oil production from 9.7 million to 10 million + barrels a day and announced it would be offering discounts to key markets by up to 20% to punish Russia. When markets reopened on Monday, West Texas Intermediate (WTI) and Brent Crude posted their worst declines since 1991, dropping 24.59% and 24.1 respectively.

Economic implications

It’s unclear how this dispute will play out, but it is unlikely to be resolved in the next few days with both sides playing hard ball. Russia has been building up a ‘rainy-day’ fund over the past few years and believe this will help counterbalance a price war, and at the conclusion of the OPEC meeting, the Saudis said the Russians “will live to regret this decision.”

While normally a declining oil price is a benefit for consumers and the economy as a whole, we are unlikely to see these benefits flow through to the market. As a result of the Coronavirus (COVID-19) airlines are cancelling flights, factories are unable to get supplies, and consumers are being forced to stay at home, so we aren’t seeing the benefits we would normally see after a decline in oil prices.

The fall in the oil price has also put extra pressure on oil producing economies who are less efficient than the large OPEC countries, the most significant being the US. The US’s breakeven is around $48‑54 per barrel, so a protracted price war, where prices could get as low as $20-30 a barrel, would be devastating for the world’s largest economy as well as the global economy as it would result in the closure of many oil rigs and significant job losses in an industry that contributes around 7.6% to US GDP. Donald Trump has already begun discussions on possible stimulus packages to help support the Oil and Gas industry, and markets believe that the Fed will likely cut another 100bps over the course of the year.

The major concern is that this price dispute might be the match in the powder barrel that results in a sharper than anticipated global economic slowdown and possibly a global recession.

Investment implications

Much like COVID-19, the oil dispute has been bad news for markets around the world and the future markets indicate that this could continue for days to come. The talk of a prolonged price war further enhanced the risk aversion of investors and saw stock markets that were already shaken from the spread of COVID-19 and its economic fallout decline sharply.

On Monday, the S&P ASX200 was down 7.33%, the NIKKEI 225 was down 5.07% and the Shanghai Composite was down 2.93%. As expected, the US markets also saw large declines, with the S&P500 down 7.60%, US government yields fell to 0.52%, and the US currency fell against all major trading partners.

Portfolio implications

Markets have experienced significant falls in a short period of time and so the natural question arises – when do we start increasing exposure to risk assets (e.g. equities)? We don’t think that time is now given the level of uncertainty and the possibility of markets digesting further negative news as COVID‑19 continues to spread throughout the western world.

Yesterday we saw the markets bounce some 3% but there is a lot more news to come in the weeks and months ahead.

As always, we will monitor developments closely and advise on any adjustments to portfolios as required.