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RBA keeps rates on hold, ASX 1pc lower in afternoon

Our latest episode of The Shot Squeeze is available here. However, turns out Kyle’s guess about the RBA possibly moving below 0.25 per cent was wrong, as it has kept rates at that level.

Senior investment advisor at Shaw and Partners, Craig Sydney, says the ASX was tracking US futures earlier today, but a lack of momentum has seen the ASX move lower in the afternoon.

“The trend has been negative, I would be surprised if we finish in the green,” he says.

“I guess there has been touted a number of potential raisings coming, whether that being Transuban, Sydney Airport, I would say a bit of money is being put on the side there.”

And trading ranges remain volatile, even though volatility indices are declining. The VIX dropped a further 1.6 points overnight to 45.24, down from 82.7 points on 16 March.

Today the S&P/ASX has so far trading in a range of 236 points. In fact, the market has traded in a range of at least 176 points every session in the past month, including one session of 665 points on March 13. But from 2000 until the start of March this year the index traded an average range of 49.2 points, hitting a high of 393.6 points on 22 January, 2008.

The Reserve Bank’s governor says interest rates will stay at emergency low levels until “progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band”.

Given the economic outlook is for a recession this year, and this morning’s surprisingly low ANZ job ad levels (at -10.3 per cent compared to expectations of a -2.9 per cent result), it could be a long time until we are on the road to full employment.

The central bank also said the first lending from its $90 billion Term Funding Facility went through yesterday. And it has bought $36 billion of Commonwealth and State Government bonds, but as conditions are improving “it is likely that smaller and less frequent purchases of government bonds will be required”.

The S&P/ASX has fallen down to 5206.8 points, a decline of 80 points, or 1.5 per cent, as the financial and healthcare sectors drag away points. Futures for Wall Street are pointing to a decline overnight, with S&P500 futures down 0.3 per cent.

Financials are down 2.4 per cent, healthcare is down 3.1 per cent, and utilities are down 3.15 per cent. The only sectors in green are info tech and real estate.

Info Tech is being boosted by Computershare’s 6.5 per cent gain to $10.82 and Afterpay’s 5 per cent rise to $21.16.

Within financials, Westpac is down 3 per cent, Commonwealth Bank is down 2 per cent, and ASX is down 5.6 per cent.

The Reserve Bank of Australia has held official interest rates at 0.25 per cent as it waits to see how the economy is responding to the efforts of it and the Morrison government to offset the financial fallout from the coronavirus pandemic.

Tuesday’s outcome was expected by financial markets after the bank last month decided to take interest rates to a record low, buy government bonds in a bid to reduce national funding costs and extend a $90 billion credit line to banks to lend to small businesses.

The bank’s decision came after the Australian Bureau of Statistics released a special survey of how businesses are responding to the pandemic, with two-thirds reporting a hit to their cash flow and turnover.

Almost half of firms say they have changed their workforces, with many cutting hours or putting their staff on leave without pay.

It seems absurd that Wall Street rallied seven per cent the same day New York city officials were talking about the need for mass graves in public parks to accommodate COVID-19 deaths. And on the same day the British Prime Minister was moved into intensive care suffering from the virus, but traders are looking through the current scenarios and especially at reports of places where lockdowns are easing. They are looking for early signs of economic activity getting back to normal.

Reuters reports that Wuhan, capital of central Hubei province, reported only two new confirmed cases in the past 14 days. It is due to allow people to leave the city on Wednesday for the first time since it was locked down on Jan. 23 to curb the spread of the virus.

Meanwhile, the Washington Post says Austria and Denmark on Monday are the first European countries to announce plans to reopen their societies, hoping they may have already weathered the worst of the first wave of the pandemic.

“Belgium, France, Spain and others are similarly examining how they will loosen some of the restrictions on public life. But European leaders are cautious because some countries that have sought to return to normal, such as Singapore and Japan, have seen waves of new infections,” the newspaper reported.

“Both Austria and Denmark plan to lift restrictions in stages. In Austria, small shops are slated to reopen April 14, with larger stores to follow on May 1. Restaurants, hotels and schools may be able to reopen in mid-May – though that decision will be assessed at the end of April. Strict rules about masks, social distancing and the number of people allowed into a store at any one time will remain in place, but public events may resume in July.”

“In Denmark, the plan is for nursery and primary schools to reopen April 15, while companies will resume business gradually.”

Computershare has gained 6.5 per cent today to $10.84, taking the share price back to where it was on 11 March.

Earlier today the share registry services company revised its earnings guidance, saying it now expects earnings per share to be about 20 per cent lower than in 2018-19. This is worse than guidance given on 11 March that earnings per share would be down around 15 per cent.

“The latest interest rate cuts were earlier than we anticipated,” chief executive Stuart Irving told shareholders.

“Coupled with reduced transactional revenues and foreclosure suspensions, earnings will be impacted.”

Computershare earns interest on the sums of money it holds for companies ahead of major acquisitions or dividends payments, so lower interest rates lowers its income.

Despite delivering worse guidance, the stock has rallied today getting as high as $11.35 at 10.30am, which was soon after analysts and investors wrapped up a conference call with Mr Irving and chief financial officer Nick Oldfield.

During the call Mr Irving said there were some opportunities in counter-cyclical business divisions like bankruptcy administration and equity capital raisings.

“We have assumed an initial “corona shock” on slower M&A activity and some client dividend cancellations. Balances are then expected to rise modestly through 2020-21 as Mortgage Services in the US continues to grow, and our Class Actions and Bankruptcies businesses enjoy heightened levels of activity.”

So far 84 clients around the world have suspended dividends, less than 1 per cent of what Computershare manages. And only 200 out of 6,000 clients have postponed or cancelled their annual general meetings.

However, the company’s US bankruptcy advisors are very busy, Mr Irving said.

“The global pause in business that’s pushing companies to the brink of failure hasn’t yet caused a spike in bankruptcies. But I suspect it will,” he said.

“We currently have 12 Bankruptcy cases won but not filed, with six won in the past two weeks. Compare this to last calendar year, where [US subsidiary] KCC filed only 24 new cases for the whole year

“While it is not a business I have spoken about much over the last few years, I am very grateful for it improving contribution in these challenging times!”

The Australian Office of Financial Management this morning sold $1 billion worth of a bond paying 1.5 per cent coupon over 11-years and received $4.2 billion worth of bids. The yield was 0.8848 per cent.

The AOFM last week said it was planning to issue around $5 billion worth of bonds every week over three tenders from now on. It is creating two new bond lines, one of three to five year bonds, and one of ten to 12 year bonds, and expects to establish a 30 year bond next financial year. The AOFM continues to issue into other existing bond lines too.

Meanwhile, the Reserve Bank’s asset purchasing program is helping to support the government bond market, which may eventually lead to the corporate bond market re-starting.

“The overall package that the RBA has implemented over the last few weeks has seen huge amounts of liquidity at the front end,” says senior fixed income strategist at CBA global markets, Philip Brown, referring to shorter-term bonds like three month to one-year bonds.

“The RBA’s buying is contributing to the resumption of the bond market, which is allowing the government to fund itself,” he added.

The market got so volatile in late March that for one week, from the 19th to 30th, there was no primary issuance of bonds by the AOFM, although it did issue Treasury notes. On the 18th it had managed to get an issuance of $500 million away, but there was a large difference of ten basis points, between the best and worst bids. Normally that spread is just a few basis points. On 19 March to RBA announced it would start buying assets.

“During the absolute peak of the volatility, there was still a bond market, it just wasn’t a market where the government could conduct primary issuance,” Mr Brown adds.

The S&P/ASX 200 started the day optimistically, getting as high as 5423 after Wall Street indices closed more than 7 per cent higher. However, that enthusiasm has waned and the index dropped down to 5252 around 12.30pm, a fall of 0.4 per cent.

Heavyweight stocks like CSL, Commonwealth Bank, Telstra, Woolworths, and Wesfarmers are all lower and dragging on the market, even though more than half of the index is trading higher.

The biggest decline is an 8.7 per cent fall in HUB24, followed by an 8.3 per cent decline in Metcash, and 5.9 per cent in Estia Health. National Storage is down 5.6 per cent to $1.61.

The biggest gains include PolyNovo, up 11 per cent to $1.86, while EML Payments is up 10.5 per cent to $2.42 and Flight Centre is up 8.4 per cent to $9.67. The travel company was up as much a 27.4 per cent this morning to $11.37 when it resumed trading after a capital raising.

Wagering heavyweight Tabcorp is checking if its workers are eligible to receive the federal government’s $130 billion Job Keeper subsidy, as it benches over 700 employees until June 20.

Tabcorp is also moving full time workers to eight day fortnights and cutting its roster of technology contractors by 40 per cent. This comes as the restrictions put in place to contain the COVID-19 outbreak temporarily puts hotels, TAB agencies, and sports events out of commission.

The company’s CEO, David Attenborough, who has taken a 20 per cent cut in his fixed remuneration until June 30, said that measures taken to contain the spread of the outbreak had taken a toll on operations, forcing Tabcorp to temporarily reduce its active workforce.

Affected employees can access their accrued leave benefits and Tabcorp expects them to resume once business picks up again. Apart from Mr Attenborough, Tabcorp’s chairman and non-executive director fees have been reduced by 10 per cent until June 30. This reduction is in addition to the 10 per cent cut that took effect on September 1, 2019.

“At this stage, Tabcorp cannot reliably quantify the effect of COVID-19 on the overall earnings of the Group. Consequently, Tabcorp is not currently in a position to provide specific guidance on earnings or financial impacts of COVID-19 on the Group in FY20 and FY21,” the company said on Tuesday.

Share are up 3.9 per cent to $2.80.

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