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The Bounce

March 27, 2020

The Bounce

As of today, the XJO (ASX 200) has bounced 10% since hitting a low of 4402 (down 38.8%) on the 23rd of March. Many investors will ask how the bounce has happened, whether it is sustainable and if there are opportunities at this level.

As of today, the XJO (ASX 200) has bounced 10% since hitting a low of 4402 (down 38.8%) on the 23rd of March. Many investors will ask how the bounce has happened, whether it is sustainable and if there are opportunities at this level.

How have we got here?

There are several factors behind the recent rally. Most notably is the huge fiscal and monetary stimulus from the US government. The $2 trillion dollar stimulus bill, in response to the pandemic, passed through the US Senate 96-0, with the House of Representatives to vote later today.

Highlights of the bill include:

  • US$500 billion lending package (including $32 billion for the airline industry)
  • Jobless workers getting US$600 a week extra for four months
  • Direct payments of US$1,200 – US$2,400 to citizens (depending on marital status)

There has been positive news regarding the spread of COVID-19, with the CEO of Chinese telco giant Huawei, Ren Zhengfei, stating that 90% of the Chinese labour market have returned to work. Further announcements that Italy is appearing to flatten the curve of new cases of COVID-19, has provided confidence to the market.

 

The sustainability of the market

As discussed, the markets have been buoyed mainly by the stimulus packages. Although still to pass the House of Representatives (which it almost certainly will), it is unknown how much the package can mitigate the impact of COVID-19 on the economy. President Trump has also discussed lifting some restrictions in order to keep the economy going.

In the short term, next Tuesday is the end of the month and Q1 2020. This is the time where US pension and mutual funds will rebalance into equities. The dollar value of this could exceed US$255 billion globally with US$190 billion in the US, which may cause the market to rally.

The effectiveness of global stimulus and a flattening of the curve is positive for the market and this could be the beginning of a recovery rather than a bear market bounce. If the latter occurs and we retest recent lows, the market may present a favourable entry point for another rally. Either way, there are a number of trading opportunities during this volatile time.

Away from the virus

The production war between the Saudis and Russia sees no signs of abating. 40% of Russia’s budget is made up from oil and gas revenues. Russia’s current budget is based on an oil price of US$42. With US$570 billion in foreign currency reserves, Russia have a buffer during this conflict with OPEC. However, there is only a finite amount of time Russia can stomach low oil prices.

President Vladimir Putin is not known for his contriteness but any news of “dialogue” between the Kremlin and the Saudis could see a huge rally in oil prices.

Equities in view

Domestic equities have sold off dramatically during the market crash. While these have rallied off their lows, valuations remain attractive and these prices may present lucrative opportunities for investors.

Below are a few examples of domestic equities and recent price movements.

Please contact your adviser if there is anything in this report that you would like to discuss further.

 

High $41.34 – 23/1/20

Low $24.05 – 13/3/20 (down 41.80% from high)

Current $29.03 – 27/3/20 (up 20.7% from low)

 

High $91.05 – 14/2/20

Low $53.44 – 23/3/20 (down 41.8% from high)

Current $57.66 – 27/3/20 (up 7.9% from low)

 

High $36.28 – 8/1/20

Low $14.93 – 23/3/20 (down 58.85% from high)

Current $16.84 – 27/3/20 (up 12.79% from low)

 

High $3.94 – 13/1/20

Low $2.87 – 23/3/20 (down 27.1% from high)

Current $3.04 – 27/3/20 (up 5.9% from low)

 

High $152.35 – 20/2/20

Low $70.45 – 23/3/20 (down 53.76% from high)

Current $80.01 – 27/3/20 (up 13.57% from low)

 

High $74.91 – 14/2/20

Low $30.10 – 23/3/20 (down 59.82% from high)

Current $38.16 – 27/3/20 (up 26.78% from low)

 

 

Please note this is General Advice only and doesn’t take into consideration your personal circumstances, objectives, financial situation or needs

Past performance is not a reliable indicator of future performance.

This article is provided by Reach Trading Premium, corporate authorised representatives of Reach Financial Group Pty Ltd who holds Australian Financial Services Licence Number 333297.

 

Sources:

 


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