On a short-term timeframe, the US share market went bullish on 13 April and the Chinese share market followed on 6 May. The Australian share market is still flirting with that prospect but isn’t there yet (see chart below). On a longer-term basis, all stock markets are still bearish.
Technical analysis
America’s S&P 500 index’s red 10-day trend line is above its blue 30-day trend line though its momentum has slowed.
China’s Shanghai share index’s red 10-day trend line is above its blue 30-day trend line and its momentum has recently quickened.
Australia’s All Ords index’s red 10-day trend line remains below its blue 3-day trend line and its momentum has slowed.
The Global share index’s red 30 day-trend line remains below its blue 300-day one, suggesting the secular bear market isn’t yet over.
Gold continues with strong momentum over a nine-month framework but other Australian asset classes (property, finance and resources) still show negative momentum, although resources less so.
Gold wins globally over a 9-month period, with only USA stocks enjoying positive momentum over the same timeframe. Other developed and emerging stock markets remain in the doldrums.
Bull-v-Bear contest
On the pandemic crisis, the bulls say “it’s all over, red rover”. New cases have been plummeting in Italy and Spain since late March and in New York since early April, with no sign yet of a second-wave outbreak. The rise outside New York is because it started there later and hasn’t yet peaked. And the plateauing in Britain hides its fall in London but its rise elsewhere as the virus ripples out.
Bulls say the economy will quickly bounce back because it was caused by a mandated shutdown, which, once lifted, will see consumer and investor sentiment soar. Many companies have discovered innovative ways to market their products and saved money on shifting to remote working (including offshoring), which will lift their profits in future. Zombie companies (e.g. Virgin) have fallen by the wayside and will be replaced by others with stronger balance sheets. This creative destruction will give the share market a new lease of life.
The bears say “not so fast”, since a second Coronavirus wave is likely, once lockdowns phase out. The capacity of each country’s intensive care units to cope with new cases will dictate the extent to which restrictions are reintroduced. The world is going through its first depression (a real fall in GDP of over 10%) since the 1930s and once governments remove special welfare support measures, consumer spending will plummet further. In Australia’s case, 5 million workers are on Jobkeeper subsidies and 1.6 million are receiving Jobseeker payments. That means over half the Australian workforce (12 million) is on welfare.
By the end of September, Jobkeeper ends and Jobseeker halves to the previous Newstart rations. Treasury says if the lockdown is over by July, then 850,000 of the 6.6 million on work welfare (13%) should be back at work. That still leaves over 5.7 million in limbo without adequate income security.
Bears paint a scenario where businesses start recovering over the next three months, as restrictions are eased in three steps, but the economy then re-slumps, as the welfare mat is removed from over 5.7 million stranded workers. Also immigration, overseas tourism and new foreign student intakes are closed until a COVID-19 vaccine is found, which will act as a brake on the Australian economy well beyond the end of the domestic lockdown.
The bulls say the government will have no choice but to extend welfare measures and/or mount a massive capital works program to jump start the economy, once the lockdown is over. If need be, this will be funded by the Reserve Bank buying government bonds and holding them indefinitely. The cost to the government will be nil since the RBA will return the bond coupon income as dividend payments to the Commonwealth Treasury.
Furthermore, Australian mining exports (iron ore, coal and gold) remain strong (thanks to China returning to work) so our trade surplus is growing (thanks also to falling imports). This is strengthening the Australian dollar, which has also been buoyed by the international acclaim of Australia’s successful handling of the pandemic, compared with its shambolic management in Europe and America.
The spat between bulls and bears will continue. What we know at this stage is that share markets here and abroad have risen from the trough reached on March 23 but since mid-April, this rally has slowed (lost momentum), except in China, where the economy is now almost back to normal after ending its 11 week lockdown on 7 April.
Everyone is watching China because if the pandemic returns there with a vengeance, it’s a bad omen for the rest of the world now easing out of lockdown. But if China keeps steaming ahead, the bulls will be elated. They shall want to keep stock markets powering on, notwithstanding corporate earnings outlooks for companies both here and abroad being drastically revised down. Also, balance sheets need replenishment after run ups in debt and run downs in working capital. But stock markets try to look beyond immediate circumstance to what the world will be like on the other side. Here the bulls say, “just fine” and the bears say, “severely impaired”.
Only time will tell who’s right.
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