Australian dollar slips as RBA flags rate cuts, ASX drops to three-month low
Australian shares have dropped in early trade, as global markets sank to their lowest levels in seven weeks on fears of a slower economic recovery in the United States and Europe.
By 11:50am AEST, the benchmark ASX 200 index was down 0.8 per cent to 5,776 points.
After four straight days of losses, the market has fallen back to where it was in mid-June.
Some of the worst performing stocks were Virgin Money UK (-7pc), News Corp (-4.4pc), Gold Road Resources (-6.1pc) and Perseus Mining (-5.3pc).
Mining and banking stocks were the biggest drags on the market, including Westpac (-1.9pc), ANZ (-2.1pc), Fortescue Metals (-3.3pc) and Rio Tinto (-2.7pc).
On the flip side, Appen (+3.6pc), ResMed (+3.1pc) and Collins Foods (+5pc) were the best performers.
The Australian dollar had dropped (-1.2pc) to 72 US cents.
It also fell to 75.29 Japanese yen (-1pc), 4.9 Chinese yuan (-1pc), 56.2 British pence (-0.3pc) and 61.25 euro cents (-0.4pc).
Currency dips on stronger greenback and RBA
Most of the currency’s losses were driven by the “risk-off” sentiment on US and European share markets overnight, and the greenback jumping to a six-week high.
However, the latest comments from a senior Reserve Bank economist —about unconventional measures to stimulate the economy — added slightly to the losses.
The central bank was assessing various options including currency market intervention and negative rates to meet its inflation and employment goals, RBA deputy governor Guy Debelle said on Tuesday morning.
“Given the outlook for inflation and employment is not consistent with the Bank’s objectives over the period ahead, the Board continues to assess other policy options,” Dr Debelle said.
One option being considered is to buy bonds with maturities beyond three years to help lower longer-dated government bond rates, he said.
The RBA is currently targeting three-year yield at 0.25 per cent.
Foreign exchange intervention was another potential policy option, though Dr Debelle said it was not clear whether this would be effective given the Australian dollar was “aligned with fundamentals”.
“That said, a lower exchange rate would definitely be beneficial for the Australian economy, so we are continuing to watch developments in the foreign exchange market carefully.”
A third option would be to lower the cash rate without taking it into negative territory.
The final option was negative rates, though Dr Debelle said the empirical evidence on its success was mixed.
The RBA has said on multiple occasions negative rates were “extraordinarily unlikely” in Australia, though Dr Debelle did not repeat that message.
Since its emergency meeting in mid-March, the RBA had slashed interest rates to a record low 0.25 per cent to backstop the economy from the coronavirus crisis.
It also launched an “unlimited” Government bond-buying programme and a cheap funding facility for banks.
The bank has held rates since then, saying it would maintain its “highly accommodative settings” as long as required to support the flagging economy.
‘Unrelenting’ coronavirus weighs on Wall Street
The local share market’s losses came after an overnight sell-down on Wall Street, for the third straight week, on rising uncertainty ahead of the US election.
Adding to the negative sentiment were concerns about the economy stalling, with no signs Democrats and Republicans will compromise on a further stimulus package any time soon.
In the end, the Dow Jones index lost 510 points (or 1.8 per cent) to 27,148 points overnight.
The S&P 500 fell (-1.2pc) to 3,281, and was down about 9 per cent from the record high it reached on September 2.
The tech-heavy Nasdaq slipped (-0.1pc) to 20,779.
Wall Street’s fear gauge shot up to its highest level in nearly two weeks. At its daily peak, the VIX index surged (+11.2pc) to 30.55 points on Monday (local time).
“An unrelenting rise in coronavirus cases globally is weighing on sentiment at the start of the trading week as investors increasingly question their rosy predictions about the recovery,” said Raffi Boyadjian, senior investment analyst at online broker XM.
Ginsburg’s death may impact US economy
Since March, the United States has pumped $US3 trillion into its economy to offset the impact of COVID-19.
That included an extra $US600 per week in unemployment benefits for millions of out-of-work Americans — similar to Australia’s JobSeeker supplements.
But those additional payments expired in late July, and the bitterly-divided US Congress has been unable to agree on how much to spend on another coronavirus-response bill.
Time is running out for politicians to pass much-needed unemployment payments before the US election in 42 days.
The death of liberal US Supreme Court Justice Ruth Bader Ginsburg will also complicate matters.
President Donald Trump is rushing to fill her vacancy on America’s highest court with a conservative judge before the November 3 presidential election — a move that will trigger a bitter fight with Congressional Democrats.
This would make the passage of another stimulus package in Congress unlikely.
“It just kind of crowds out the agenda, the idea that we are going to get a fiscal stimulus package before the election,” said Ed Campbell, managing director at QMA New Jersey.
“There is also just general election-related jitters … and possibly that we have a contested or delayed outcome.”
European markets sell off
Markets in Europe were hit even harder on fears of renewed COVID-19 lockdown measures in Europe and Britain.
Britain’s FTSE dropped 3.4 per cent to 5,804, while Germany’s DAX plunged 4.4 per cent to 12,542 points.
The United Kingdom is considering a second national lockdown as new cases rise by at least 6,000 per day.
Meanwhile, Denmark, Greece and Spain have introduced new restrictions on activity.
Iron ore plummeted (-4.1pc) to $US119.82 per tonne.
Oil prices also tanked, with Brent crude (-3.2pc) down to $US41.76 per barrel.
Spot gold dropped (-2pc) to $US1,911.71 an ounce, while silver plunged (-7.7pc) to $US24.80 an ounce.