Australian blue-chip shares jumped 2% in response to the RBA restarting bond-buying while the state of Victoria battles a second wave of the coronavirus.
The Story
The Reserve Bank of Australia kept interest rates steady at the record low of 0.25% at its regular policy meeting today but announced it would re-enter the Australian bond market. The RBA is targeting a 0.25% yield on 3-year government bonds. Yields have been a little over target, so the RBA is stepping in in order to usher them lower via its QE program. Lower government yields support lending in the real economy and make stocks relatively more attractive than bonds as a source of income for investors.
The RBA needn’t have pre-announced the bond purchases but seems to have done so for dramatic effect. The announcement is a signal that the central bankers will not stand by while rising coronavirus cases in the state of Victoria threaten the economic outlook.
Price Action
Chart: ASX 200 (XAT) (1-month)
What’s next?
Maybe some catchup. Australian shares had started to underperform - likely as a combined result of the return of an economically damaging lockdown policy in Melbourne and the RBA sitting on the side lines without bond purchases. Today’s decision to take action from the RBA solves half the issue, while more draconian measures like the announced 'state of disaster' and curfew yesterday can hopefully flatten the curve of new virus cases. Put together, Australian shares have some room to squeeze the difference with shares in the US.
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