Another tense, confusing and, at times, scary week for financial markets as Governments and investors around the world come to grips with the devastation of the Coronavirus.
It has been good to catch up with so many of you during my Facebook Live sessions this week. I usually do them at 1.30pm EDT every Tuesday but, because of so many requests in these rapidly changing times, I ended up doing them daily this week.
If there’s another Economic Stimulus Package over the weekend then I’ll answer your questions about it in a Monday session.
How frightening that the death rate in Italy has now exceeded China. It just shows the consequences of taking this pandemic too casually in the early stages. We’re all learning that lesson and making sure we don’t make the same mistake.
This week we’ve had extraordinary action from the Reserve Bank and over the weekend the Federal Government will unveil an Economic Stimulus Package 2.0… which will be many times bigger than last week’s Version 1.0.
Before I give some thoughts on these, it’s worthwhile taking a step back and seeing, through these 3 graphs courtesy of Commsec, just how the world has changed in 4 weeks.
The Reserve Bank’s actions have been enormous… in helping the banks
The RBA took the extraordinary step of taking an out of sequence decision to cut official interest rates by 0.25 per cent this week… without a monthly board meeting… with cash rate now at a record low 0.25 per cent.
But it’s what else they did this week which is more important.
The RBA pumped billions of dollars into the financial system to assist the banks to keep lending on very generous terms. When people get into trouble with their loans over the next 6 months the banks have to have the cash to help them out.
And that seems to be the trade off the Government has negotiated. Basically, the Government and RBA have said to the banks we’ll make sure you have the cash, your role is to make sure it’s used properly.
That’s why banks haven’t passed on this latest rate cut to variable home loans. It’s because they know borrowers will use it to pay down their mortgage rather than go out and spend the money to stimulate the economy.
Instead they cuts fixed rate home loans and increased savings rates. Plus…
And the banks are trying to save their small business customers
Instead of cutting variable home loans by 0.25 per cent, the big banks are cutting business loans a full 1 per cent. This is the trade off the RBA and Government have done with them.
This pandemic and inevitable economic recession is putting huge pressure on small business are they are already shedding thousands of jobs.
To keep them afloat and, hopefully, stop them laying off staff, their business loan interest rates have been cut 1 per cent plus been offered a repayment deferral for 6 months.
That means no repayments on business loan, which are usually secured by a house, for 6 months when the economy will hopefully be improving. Those repayments will be capitalised into the loan to be paid in the future.
It is a huge fillip for small business.