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Continued Volatility in the Share Markets

The weekend brought a raft of new measures to enforce social distancing and contain the COVID-19 virus spread, in response to continued acceleration of Australian cases. At this point there is a high degree of uncertainty over the economic impact of containment measures on one hand – and the ability of fiscal measures to mitigate this effect on the other.

The “gap” between these two poles of uncertainty is driving the extreme volatility in markets.

Only time will reveal the full impact – and the key determinant here is the rate at which the virus continues to spread. Given that governments are prioritising health over the economy, infection rates will determine how stringent containment measures become and how soon they can be relaxed.

At this point Australian federal government advice around the closure of non-essential services is limited to entertainment – casinos, pubs and clubs. The effects will be material – but an order of magnitude higher if they are extended to retail and construction. This can’t be ruled out. Again, the rate of new infections will be a key indicator, as will observation of the degree to which people are social distancing. The government does not want to see thousands flocking to Bondi Beach.

There are long-term consequences for government balance sheets. But for the moment the sheer size and relative speed of fiscal programs suggest governments appreciate the importance of ensuring that a health crisis does not morph into a systemic financial crisis.