News & Analysis

Melbourne Lockdown: Local Investors Mull Worsening Economic Outlook

July 8, 2020

By Deepta Bolaky
 @DeeptaGOMarkets

Following the highest number of coronavirus cases in a single day, the Premier of Victoria, Daniel Andrews reinstated “Stay at Home” restrictions across metropolitan Melbourne and Mitchell Shire from 11:59 pm on Wednesday 8 July. The Treasurer warned that the cost of locking down Victoria could be up to $1 billion a week which will fall heavily on businesses.

Local investors mull the worsening economic situation that will hit the Aussie economy following the Melbourne lockdown.

Australia Share Market

Faced by the resurgence of infections in other countries as well, global stocks seemed to have paused on Tuesday. Following Wall Street’s leads and the lockdown announcement of Victoria, the ASX is trading in a sea of red on Wednesday. To the exception of the Consumer Staples sector which constitutes of stocks of companies and businesses that manufacturers or distributes essential products, most sectors are trading in negative territory:


Source: Bloomberg Terminal

Looking at the best and worst performers, we can see that gold-related stocks were outperforming. The precious metal rallied to multi-year high and is trading just below a key psychological level of $1,800 lifted by safe-haven demand. Northern Star Resources in its June Quarter Trading updated advises that its cash, bullion and investments rose by 40% to A$769.5 million at June 30, 2020, up from A$551.4 million at March 31, 2020. The gold producer’s share price is currently up by 6.5% at $14.84.

Source: Bloomberg Terminal

As of writing, the ASX200 was trading 1.4% or 81 points lower to 5,932.

Aussie Dollar

Amid a relatively subdued calendar, the Aussie dollar is mostly left at the broader sentiment of the markets. On Tuesday, the RBA Interest Rate Decision and Statement was the main event for the Antipodean currency. As widely expected, the RBA kept interest rates unchanged at 0.25% but highlighted the uncertainty of the nature and speed of economic recovery. The Aussie dollar which was trading just below 70 US cents before the RBA’s statement and the lockdown announcement retreated to the downside. As of writing, the Aussie dollar was trading lower at 69.40 US cents. 

By Deepta Bolaky
 @DeeptaGOMarkets


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice. For more information of trading, check out our forex trading courses.

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By Deepta Bolaky
 @DeeptaGOMarket

EU Recovery Fund

After a standoff between the EU and Germany, following a critical ruling on ECB’s quantitative easing program by Germany’s constitutional court, the gradual reopening of economies of member states within the Eurozone has brought some optimism.

The downside risks for the Eurozone and its shared currency have somewhat eased on the fact that Europe, which was the epicentre of COVID-19 after China, might have gone through the worst phase of the pandemic. The sentiment for the Euro was also buoyed by the EU Recovery fund proposed by Chancellor Angela Merkel and President Emmanuel Macron to help Europe’s mostly hit countries.

Unfortunately, the optimism over the coronavirus fund proposal, which aims to show unity in overcoming the crisis and to achieve quicker economic recovery, was short-lived.

Europe’s Frugal Four 

Amid an unprecedented crisis, the Franco-German proposal was to provide support and reinforce EU financial relations and show that Europe is standing together. Austria, Denmark, the Netherlands and Sweden, dumbed as the “frugal four” put forward a counter-proposal that highlights the diversion of opinions in helping the Southern members states.

Grants or Loans

The Franco-German proposal is about “overcoming the crisis united and emerging from it stronger”. Both leaders proposed to make outright grants to help countries in need. They want to launch a temporary fund of 500 billion euro for EU budget expenditure:

“This would not provide loans, but rather budget funding for the sectors and regions hit hardest by the crisis. We firmly believe that it is both justified and necessary to now provide funding for this from the European side that we will gradually deploy across several European budgets in the future.”

In contrast, the frugal four wishes to provide loans rather than grants to southern European countries and expect the recipients of loans to comply with the fundamental principles of the EU and commit to strong reforms in repaying the loans. Their two-year and “one-off” proposal appears to also outline how those countries should use the funds and target sectors that are mostly hit based on an assessment.

The coronavirus pandemic is testing the solidarity of European members and is threatening to reawaken a euro crisis. Southern countries like Greece, Italy and Spain lacked the fiscal space they need to put forward an economic stimulus package to support their economies, compared to Northern countries. 

Disparity? Compromise?

Both proposals are saying “yes” to emergency aids to assist with recovery, but the disparity lies on how the funds will be financed to respond to the economic wreckage. The size of the emergency fund, the conditions of the funds or whether it will be grants or loans will be a compromise the markets are expecting to see. However, the type of compromise might be a key factor in determining the relationships of EU members.

Unprecedented times probably need unprecedented Unity.

Euro – The Shared Currency

The fact that Europe may have gone through the worst phase of the coronavirus has somewhat eased the downside risks of the shared currency. But the current geopolitical tensions with China and uncertainties on the EU Recovery plan are putting a lid on the upside momentum of the Euro.

After the sharp plunge in March, the EURUSD pair has been trading within the 1.08 to 1.09 range. Yesterday, the better-than-expected IFO Surveys in Germany has helped the pair to hold ground and hover around the 1.09 level. The recovery plan could mitigate the selling pressure and allow a probable move above 1.10 level if there is a compromise that satisfies the frugal four.

EURUSD

Source: Bloomberg Terminal

The immediate attention turns to the European Commission which is supposed to unveil a draft recovery plan on May 27th, 2020.

By Deepta Bolaky
 @DeeptaGOMarkets

Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

About GO Markets

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