Market Overview

9 April 2020

The Viral Situation in the US is Worse but European Financial Institutions Are Slower to Respond

The second half of the short Easter week in Europe is marked by heated discussions between the region's finance ministers and other EU officials. Therefore, despite the more positive pandemic background in European countries compared to the United States, most of the European markets and the pan-European Stoxx 600 index are less inclined to extend the previous gains made so far in comparison to the American stock indexes, such as, the S&P500 and Nasdaq.

After all night talks on Wednesday during a video conference, the representatives of EU countries failed to agree at the first attempt on how to financially respond to the virus crisis. That is certainly reviving old doubts about the long-term viability of the Eurozone common institutions. The Chairman of the Eurogroup and the Portugal finance minister Mario Centeno tweeted on April 8: "After 16h of discussions we came close to a deal but we are not there yet. I suspended the Eurogroup & continue tomorrow, Thursday. My goal remains: a strong EU safety net against fallout of covid19 (to shield workers, firms &countries) & commit to a sizeable recovery plan".

Just before the online conference he shared his expectations in an interview to Süddeutsche Zeitung, Le Figaro, La Repubblica, El Pais and Volkskrant by saying: "Today, a Marshall plan for the recovery can only be financed by Europeans. We are our best/only line of defence. Relying on US or anyone else is not possible or desirable. We have no one to rely on but ourselves." When he was asked a question about whether the future of the Euro is at stake Mario Centeno drew transparent analogies with the previous crisis: "We spent ten years preparing for the previous financial recession and nevertheless the response was slow, inaccurate and full of flaws, particularly at the beginning. This crisis was totally unexpected and it hit us with unparalleled severity... there are many risks and a huge uncertainty. We need to improve our communication as we improve our response to this crisis. We have been improving. The preparatory meetings for the next Eurogroup show we are more focused on solidarity and common solutions."

However, the words and positions of other participants show quite clearly that the countries of southern Europe, especially Italy, Spain or Portugal, which have suffered greatly from the spread of infection and had weaker financial fundamentals before the virus crisis, are more enthusiastic about the coordinated of funding measures than economically self-sufficient countries, such as, Germany or the Netherlands. For example, the Dutch proposal is more "humble" as it is does not aim too much towards the next stage of the recovery phase but it only focuses on the very immediate response. France has made a more generous proposal for a temporary fund backed by common debt to finance the recovery stage too. This fund is to be financed with special "coronabonds" issued under joint guarantees of all EU member states.

Previous tensions among rich EU countries and less financially successful members again made it difficult to provide measures that suits all parties. Not to forget the disaffection of some EU members with restrictions that were imposed by Brussel's regulations over previous years on the share of budget deficits for individual countries in relation to their gross domestic product (GDP). The national mostly financial measures are now close to 3% of the total EU GDP. The European central bank's (ECB) liquidity support is already around 18% of GDP with an unprecedented asset purchase program of 870 billion EUR. The scale of measures in place is something never seen before, but some countries need more specific assistance for their national companies and a discretion to distribute this financial aid by their own national decisions.

It is worth quoting Mario Centeno again: "This is no time for business-as-usual politics. We must show our citizens that Europe protects them. We must stand tall." The only question now is whether this principle of European solidarity will be embedded into practice in emergency. Meanwhile, the French central bank estimated on Wednesday that the country's economy has contracted by six % in the first quarter. That would be the biggest contraction on a quarterly basis since World War II. What a disastrous drop awaits French economy in the second quarter then?

Eurozone finance ministers are set to resume their virtual gathering today. Meanwhile, European stock indexes are already falling faster this afternoon than the US S&P500 futures, which has only slightly rolled back from its overnight highs. The pandemic in America has already reached a much more tragic scale of 435,000 infected people and the record number of deaths over the past two days. However, the American financial system is designed to make decisions on bailout plans faster and it is much more flexible even in the face of bipartisan congressional resistance. The Federal reserve system (Fed) was able to immediately throw huge amounts of money into the economy, bringing its own balance sheet to over $5.5 trillion in total.

Perhaps the Fed's appetite for printing money has not yet triggered it to judge those unofficial signals from the former Fed's Chairman Ben Bernanke. Reuters reports that the present Fed's Chair Jerome Powell may shed more light on the Fed's assessment of the situation in a live webcast on Thursday, hosted by the same Brookings Institution in Washington that invited Ben Bernanke to talk. Jay Powell will deliver remarks at 1400 GMT and then is going to participate in a virtual question and answer session to discuss the Fed's recent moves and possible plans in the nearest future.

The official reaction of the Fed in the US Federal Open Market Committee (FOMC) minutes yesterday was wordy, but vague, as expected. Fed officials just tried to show the markets that they did their best to stay ahead of the spreading virus but gave a lot of uncertainty on the economy prospects. They noted that urgent actions were the natural reaction on the "exceptionally volatile" markets on the critical movements of US Treasury yields 100 basic points lower and on the fact that "the U.S. Dollar appreciated notably against most currencies, with the exception of other safe-haven currencies". The sense of the document may prompt the idea that the Fed cares too much about the expensive Dollar even if they usually claim that their monetary policy goals are not related to exchange rates in any way.

The FOMC tried to justify the urgency of the steps taken three days before the scheduled meeting date by the situation when "expectations for the path of the federal funds rate adjusted sharply" so that "implied rates on federal funds futures contracts suggested the Committee was expected to reduce the target range 1 full percentage point". Nevertheless, FOMC members did not express the same certainty about the future: "Given the downside risks ... about the extent to which the economy will weaken and how long will it last in addition, the company's employees presented two plausible economic scenarios covering a wide range of opportunities. Important, future economic indicators will depend on this about the evolution of the virus outbreak and the measures taken by making a commitment to keep it. According to one scenario, economic activity began to recover in the second half of this year. In a more unfavorable scenario, the economy entered a recession this year, and the recovery will be much slower and in material terms, this will only happen next year."

Everybody would like to proceed from the first scenario too and the question for market investors now is whether the US financial authorities really expect this moderate scenario in reality. That is probably the main point and it's critical just for the current market movements on US stock indices and equities, while the European markets may just follow in their footsteps. Another question is what will the future hold in the next quarter or in the next half-year. But the answer to this second question will be given much later on. In the meantime, the current investment decisions or speculative style of the trading community could be influenced even more by the answer to the first of these two questions: what is the Fed betting on? The answer to it will certainly shape what will happen in reality.


Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Lysakov Sergey
Market Focus
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