March 18, 2020 07:32:42
Something extraordinary happened this week.
The securities market regulator, ASIC, stepped in and imposed controls on the share market to ensure it remains “fair and orderly”.
Why? Well, because last Friday saw the highest number of stocks ever traded on the Australian Securities Exchange.
It’s easy enough to buy and sell shares. Now that trading is online, buying or selling shares literally involves a couple of clicks of the mouse — assuming you already have an account with a licensed stockbroker.
The problem is every single transaction needs to be processed and settled. That involves both human and computerised intervention.
The problem last Friday was that the settlement system was reaching the limits of what it could process.
Staff at the ASX literally had to work over the weekend to make sure trading could resume at 10:00am on Monday.
To avoid the entire market being forced onto the sidelines, ASIC told the financial firms using high-frequency robotic trading machines to dial down those machines, by 25 per cent.
This example gives you a sense of the strain the share market is under, as investors try to get a handle on how the economy is tracking.
Fear and panic
The sheer volume of trading is also indicative of the level of fear in the market.
The chart below shows the movements of Wall Street’s VIX Index or “fear gauge”.
Earlier this week it rose to 78 — a level not seen since the global financial crisis.
It’s a tradeable index on the Chicago Board Options Exchange that represents market participants’ expectations of 30-day forward-looking volatility (think huge market swings up and down).
That’s a fancy way of saying it’s a financial markets weather forecast — predicting storm clouds as well as lightning and thunder ahead. Scary stuff.
Its current level shows the stock markets are anticipating a global recession and a US recession.
That’s bad enough, but it is not currently forecasting the economic climate will get worse than that — as it did after the 1929 stock market crash.
What the market is saying about the Australian economy
So, if the stock market is “pricing in” a global recession, what are movements on the ASX saying about our economy?
Essentially the same thing.
From peak to trough, the All Ordinaries Index and the ASX200 have fallen roughly 25-30 per cent.
That’s the same kind of market damage consistent with an economic recession.
But the market doesn’t move down all in one hit — it has up days and down days.
The volatility we’ve seen on the market last week and this week, say stockbrokers, is set to continue.
Each day, it’s entirely possible we will see market moves anywhere between 3 and 10 per cent — depending on the news flow.
Share market is pointing the way
And that’s the crucial point.
This is a health crisis, which has produced the beginnings of an economic and financial crisis.
We’re not there yet — a financial crisis, that is — but investors are trying to work out when that might happen.
Tuesday’s market resurgence is a classic example of market participants taking heart from news of a possible “cure” for coronavirus and then hunting around for stocks or securities that look “cheap” (have been heavily sold in recent weeks) now.
Given the extraordinary amount of government and central banks stimulus that has been pumped into the world economy in recent weeks, if there’s even a whiff that the pandemic can be contained soon, the financial foundation has been set for an almighty rally in stock prices.
That said, the central problem still facing financial markets — that the coronavirus pandemic has the potential to cause both a financial crisis and a serious global recession — remains.
Your questions on coronavirus answered:
What to look for
AMP Capital’s head of investment strategy, Shane Oliver, has the responsibility of looking after billions of dollars worth of client funds.
This is his central focus right now.
“The increasing number of COVID-19 cases globally and spreading lockdowns will continue to dominate in the week ahead as investors attempt to assess how long it will take to be contained and how bad the hit to economic activity will be,” he said.
The new metric for global financial markets is looking at the increase in the number of COVID-19 cases.
Each day that goes by without evidence that containment is on the way, is another day the economic outlook deteriorates.
However, big financial institutions, with billions of dollars on the line, are studying the numbers carefully and looking deeply into both government and central bank responses.
Their market activity (buying and selling of shares), on a daily basis, is a window into how they see this health crisis ultimately affecting the economy, our job security and hip pockets.
It’s one gauge you can follow to understand the extent of this health crisis.
What the experts are saying about coronavirus:
March 18, 2020 06:16:29