Well Fed

Market Update: 11 June 2020

As the Fed met overnight and committed to the lower for longer mantra as we anticipated, the “dot plot” – where voting members plot their forecast for cash rates, came out confirming no changes until the end of 2021. This shouldn’t have come as a surprise, but the Bond traders reassessed and US 10yrs moved to 0.72%, whilst Oz 10yrs moved down from 1.1% to 0.92%.

This is not to say things are worse than yesterday, but perhaps a reminder to the markets there’s a long way to go in this recovery. Consequently, ASX is 2% lower today, VIX moved a little bit higher and Gold was bid again.

What to say of AUD? Well it’s softer than it’s highs but stronger than the week’s low. It has been correlated highly to S&P but there’s a small disconnect now as it’s moved focus to the USD Index – which is near it’s March lows. For the AUD to be here does make sense as capital is redeployed globally at the cost of USD and this trend may prevail when international shares are still down from January vs S&P – which is close to flat.

So all this stimulus, deployment of capital and reopening is looking good for all the world right?? … NO. We are transitioning into the spread of COVID to the less wealthy nations/developing markets AKA those that aren’t well fed. The theme for post GFC was a rise of the large emerging markets – “BRICS” (Brazil, Russia, India, China, and South Africa). Of these nations though, only China has seemingly escaped the high number of cases per capita and deaths. From 285k cases combined a month ago or 8% of the world, they now account for 1.611m cases or 22% of the world. Why is this? It’s generally about testing. No testing means no cases confirmed, no cases confirmed means perhaps complacent behaviours and lack of knowledge who is infected. These are also countries that have a less accessible hospital system to cope. All in all, unless a vaccine is available and cheap, these countries could have prolonged and large-scale infections continuing for the year and past it.

Will this affect the Developed Markets? yes… large exporters of commodities, manufacturing and services will cause at the minimum disruption, at the maximum shortages. Recall markets obsessed about Greece’s ability to recover? this is far larger. We won’t really know how bad this pandemic can be until we see these shocks and reopen borders before a vaccine is found.

Australian 10yr bonds

USD Index

Sources: Bloomberg

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