Leading investment experts say the recent healthy bounce in Australian equities is more aligned with the government splashing cash on stimulus packages and not a true reflection of the destructive economic impacts still lingering from the coronavirus pandemic.
The demand for oil has fallen so aggressively due to the inaction of economies the futures index for the commodity recorded its first ever negative reading this week.
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This bizarre scenario means sellers were paying buyers to take it off their hands because stockpile facilities across the world are nearly full.
With cars locked in garages and planes grounded on airstrips, too much oil is being produced to justify its use — about 20 million barrels of excess oil is entering the market everyday.
The ASX closed flat after today’s trading but plunged nearly 5 per cent over two sessions on Monday and Tuesday, with investors being warned of more heavy losses to come.
“(The collapse in oil prices) tells me that equities have been buoyed predominantly by stimulus,” Pepperstone head of research Chris Weston told news.com.au.
“It’s been liquidity, it’s been central bank action, and it’s been government support but the oil market hasn’t been a beneficiary of that stimulus.
“And that’s telling you what life would be like if it wasn’t for the government.”
This weakness in commodity prices will make it difficult for energy companies alone to keep their businesses going.
Energy companies alone will struggle to keep their businesses open with this destructive weakness in commodity prices, Mr Weston said.
“The message the oil market is telling us is that we’re not going to come out of this in a V-shape recovery,” he said.
“The idea of ramping up and getting back to our daily lives is just not going to happen.
“We’re going to see some troubling times for some period ahead, there’s going to be quite a few companies that go insolvent from these (oil) levels, which is going to accentuate bad loans and losses in the banking space.”
Burman chief investment officer Julia Lee said Donald Trump’s support for getting business back to normal in the United States despite the country recording more than 2000 deaths a day could further weigh on investor sentiment.
“I don’t think the volatility is over yet especially given the US is looking to open up relatively soon, which means the COVID-19 situation could get worse quite quickly before it gets better,” she told news.com.au.
‘ONCE IN A CENTURY’
Westpac’s April market outlook said the health and economic crisis from the coronavirus outbreak was a “once in a century” event.
The major bank is now expecting the Australian economy to suffer three consecutive quarters of retractions.
The report heaps praise, however, on the Federal Government’s fiscal response, revising its expectation for unemployment from 17 per cent down to 9 per cent for the middle of the year due to the eye-watering $130 billion JobKeeper package.
But the positive sentiment drawing from the Morrison Government’s willingness to splash cash won’t last, the report warned.
Australian stocks have surged in value this week and closed nearly 3.5 per cent higher at the close of trade on Thursday but the heavy losses inflicted since mid-February will resume.
“Markets are currently buoyed by governments’ stimulus packages,” according to the report from Westpac’s chief economist Bill Evans.