Well markets this week have started to move sideways. We know it is hard to hold on during the uncertainty but markets now have the support of the US Federal Reserve. As mentioned in a previous communication/blog (click here) we believe that the falls emanating from America were the result of the Federal Reserve not “bailing out” investment markets. But this changed on Wednesday our time as the Federal Reserve on the US cut rates by 0.5% – at an emergency meeting. Initially the markets saw it as a negative – and realistically who cares about rates – but it is the statement that “we are here to help” that was important. Instead of all negatives, we move to the next phase … positive and negative!
We have also had an interest cut in Australia this week.
So the main game remains unlocking the factory that is China – when will they get back to work and unlock the supply constraints, earnings blockages and demand stalemate?
Officially China says the 48,000 subsidiaries under the 96 central government-owned firms supervised by the oversight agency have reported a 91.7 per cent work resumption rate. But the contribution of state-owned firms to China’s gross domestic product (GDP) was estimated to be between 23 and 28 per cent and their share in employment at anywhere between 5 and 15%. By contrast, small and medium-sized businesses continue to struggle to get back to work following the various quarantine and work-from-home policies. They employ the bulk of the people and apparently only 30% have resumed production.
It sounds like China is starting to get back to work, but is it all hype or is it real?
Satellite pictures of pollution indicate that economic activity in China should be picking up. Very recently nitrogen dioxide levels rose across China’s industrial heartland. The reddish-brown gas is mainly from burning fossil fuels like oil, coal and natural gas. Levels plummeted in February after Chinese authorities locked down communities to contain the virus. The satellite images confirm the anecdotal reports that Chinese workers are slowly heading back to their jobs. While pollution levels in China typically drop early in the year as factories pause for Lunar New Year celebrations, this year’s decline was huge.
This is satellite evidence of a return to work. It is more than just words and is hard to “fake”. It is perhaps the start of some good news for markets to be optimistic about. Remember the stock market is the breeding place of optimism. Where investors see the green shoots of containment or recovery, they will buy any positive. This down period in the market will not last for too long and we believe it will recover to where it was before this fall.
We remain of the view that we have some sideways movement to come (with up and down gyrations) before a jump to the upside back to 7000+ on the ASX200. The gyrations will be reactions to the headlines. Broadly speaking any reports of U.S. or global economic stimulus will be a positive for stocks, while any reports of an acceleration of the spread of coronavirus will be a negative.
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