So here we are in Victoria, entering six long weeks of lockdown.
All because of absolute political incompetence. And zero responsibility for this display of incompetence.
Greg Sheridan puts it well in today’s Australian:
‘Consider this astonishing reality. If, as it is only reasonable to believe, the absolute fiasco of the Melbourne hotel quarantine mismanagement is the main cause for the COVID-19 outbreak and the subsequent lockdown, then it is the most damaging state government failure in modern Australian history.
‘So which minister has accepted direct responsibility for it?
‘Which minister has apologised and resigned over a mess that will cost countless billions of dollars to the Victorian and national economies and have as yet unknowable health consequences?
It’s time for Dan Andrews to resign. His government is a disgrace.
In a democracy, politicians work for, and answer to the people. Andrews has failed the people he works for. He has to go.
Remember the justification for the initial lockdown? It was to ‘flatten the curve’ and prevent strain on the health system.
So why, with just seven cases in ICU (as of yesterday), is Andrews shutting metropolitan Melbourne down?
After all, the Minster for Health told us back in April:
‘A further 300 intensive care unit beds have also begun to be commissioned at the Alfred Hospital, Austin Hospital and Monash Medical Centre in Clayton — as part of a massive boost to establish an extra 4,000 ICU beds across Victoria to respond to the coronavirus pandemic.’
So there’s no strain on the health system. In fact, it’s underutilised at the moment. Yet our state mismanagers are happy to heap all the strain on the mental health of tens of thousands of small business owners across the city.
History will judge these clowns harshly.
Perhaps surprisingly, the market isn’t casting a harsh judgement on the renewed lockdowns in Melbourne.
Aussie dollar getting a boost from commodity prices
The Aussie dollar is a good barometer of global sentiment. It’s looking strong and threatening to break out to new, multi-month highs.
Learn about the critical factors that affect the rise and fall of the Aussie Dollar. Download your free copy of this special report: ‘Will the Aussie Dollar Enjoy a Post-Pandemic Resurgence?’
It finished the overnight trading session at 69.80 US cents. A break above 70.3 US cents (see chart below) will represent the highest level in 12 months.
The Aussie dollar is clearly getting a boost from healthy commodity prices.
Iron ore rose strongly overnight, as did the copper price.
Have a look at the performance of copper since the March low…
It’s as though the virus never happened!
A combination of supply fears from Chile (the world’s largest producer) and strong demand from another round of stimulus in China is behind the price spike.
There’s also the US dollar factor. After plunging, then peaking, in March, the US Dollar Index has been on a downward trend. As you can see in the chart below, it initially bottomed on 10 June. It then bounced higher. But in the past week or so, the dollar index has rolled over.
This weakness is obviously giving a boost to dollar-denominated assets like commodities.
But for how long?
The ‘short’ US dollar trade is getting a little crowded. Speculators have built up the largest ‘net short’ position against the dollar since 2012/13. This means a historically large number of punters are betting on continued falls in the US dollar against a range of other fiat currencies.
Maybe they’re right. But history shows when the speculators increasingly move to one side of the boat, it generally tips them all out.
The bond market isn’t playing along
The direction of the dollar is vitally important in determining the direction of other asset markets, especially equities.
As the chart above shows the dollar put in a bottom on 10 June. The S&P 500 peaked two days later, then corrected sharply as the dollar strengthened.
Continued weakness in the dollar will likely see the S&P 500 rise to another high. But if the dollar begins to rally, it will likely put pressure on stocks in the weeks ahead.
While the stock market, the US dollar and commodities are all pointing to better economic times ahead, the bond market isn’t playing along. The yield on the global benchmark, US 10-year Treasury, refuses to budge.
It’s currently sitting at 0.66%, more or less unchanged over the past three months. That tells you the bond market doesn’t see an economic recovery coming anytime soon.
If it did, bond yields would rise.
So that big copper rally I mentioned above would feel a lot more legitimate if it was accompanied by an increase in bond yields.
Australia, with a 10-year government bond yield of 0.9%, is also virtually unchanged over the past three months.
Either the bond market has it badly wrong, or asset markets are simply levitating on a sea of liquidity.
I’m tipping it’s the latter…