Market Overview

21 July 2020

EU's New Financial Generation Kicks Off Another Wave of Market Optimism

Even before the happy end of the five-day historical European summit, this summer's newly updated record above the 3,250 mark on the broad-based U.S. S&P500 index late in New York set a very positive tone for the global markets. This American mood was caught by the European wings and was then raised even higher with fresh four-month highs of the Euro Stoxx 50 composite index and also by national German and Italian stock indexes. The French CAC40 index is still on track to repeat its peak values of June. A new multi-year high record above $1,828 was also shown for gold, which many investors are used to adding to their investment portfolios along with a variety of stock assets, which may also clear the way to higher levels for some other precious metals and commodities.

Thus, the current rise in share prices is particularly strong, since it is caused not by one, but at least four reasons at once. The first reason is represented by another strong wave of a growing rally in high-tech companies led by such giants as Amazon and Google. In particular, Amazon surged almost eight % after Jefferies Financial Group, and some other financial services companies, upgraded its price target on the stock to $3,800 from $3,100, citing an acceleration in online spending this year ahead of Amazon's earnings release this Thursday, while Google's price move still looks technically insufficient compared to the rally of many other Internet companies.

The second reason is a hot discussion in U.S. Congress on another financial aid plan to support the economy to the amount of at least one trillion Dollars - the Democratic party proposed even much bigger figures. Congress is set to debate a new aid package this week with some support programmes due to expire by the end of the month. The third reason for such recovery optimism is  the information flow which came through the channels of several countries, including the United States, Great Britain, Germany and Russia, about the high stage of readiness of the vaccine against the coronavirus. The race for the vaccine continues, with the U.S. AstraZeneca and Oxford University in the UK revealing positive updates.

Phase one of the Oxford University trial, which included 1,000 patients, showed that doses of the vaccine triggered an immune response in patients, boosting their antibodies and white blood cells to fight the virus. "The immune responses observed following vaccination are in line with what we expect will be associated with protection against the SARS-CoV-2 virus, although we must continue with our rigorous clinical trial program to confirm this," said Andrew Pollard, chief investigator of the Oxford Vaccine Trial. "We saw the strongest immune response in participants who received two doses of the vaccine, indicating that this might be a good strategy for vaccination," he added.  U.S. drug maker Pfizer and German biotech firm BioNTech reported additional data from their experimental COVID-19 vaccine that showed it was safe and induced an immune response in patients.

The head of the Russian direct investment Fund (RDIF), Kirill Dmitriev, said he expected about 200 million doses of the COVID-19 coronavirus vaccine to be produced by the end of the year, 30 million of them in Russia, and the remaining  amount will be produced in cooperation with other countries who participate in the project. He specified that 40 or maybe 50 million people need to be vaccinated in Russia. The head of RDIF recalled that the Russian vaccine candidate has successfully passed the first stage of clinical trials, and the second stage will be completed by August 3. At the third stage, tests will also be held in the Emirates, Turkey and in several African countries. According to Mr. Dmitriev, the vaccine is going to be approved in August, after which it will be possible to start production, as the authorities of partner countries may approve the drug in September. Kirill Dmitriev believes that the production of the vaccine "will be able to stop the potential second wave of the pandemic».

As for the victorious economic news from Europe, which became the fourth powerful reason for the present wave of market optimism, ise probably already well known to everyone. The main pathos of the difficult agreement concluded by European countries, which has been called the New Generation EU, or NGEU, is that the major "donor countries" and "recipient countries" most affected by the virus, finally succeeded to agree not only on a €750 billion common package, as the missing money will be put into the markets as a loan by the European Commission, with a return date as far away as 2058, but they also agreed on the use of €390 billion part as irrevocable subsidies, or grants, for the countries. This is, of course, less than the originally estimated €500 billion, but it is much more important that national plans to use this money will now have to pass an expert assessment and approval procedure by a qualified majority of 27 European States, but without the right of veto from any country.

Italy will receive €209 billion Euros over the next six years, while Spain can expect to receive €140 billion Euros over the same period. Only Greece will be allocated with €32 billion Euros just as part of the current package, not counting more money from the EU budget until 2027. Most likely, national plans for economic recovery may  be easily approved soon thanks to this decision, on the principle of "one hand washes another and both the face", and the minority of Northern countries may  not be able to spoil the party. In exchange, the "donor countries" will receive discounts on their financial contributions to the EU budget, and part of the project will be funded by taxes on plastic production and on global IT companies, which Europe will now actively coordinate and promote, in an attempt to defend European natural interests.

We can only agree with Sophie Wilmes, the Prime Minister of Belgium, as she tweeted: "Never before did the EU invest in the future like this”. Of course, this does not only set a strong background for the markets, but also gives hope for more European unity for the future, creating a solid economic base for a new generation of Europeans. And it's a very good sign that the politicians of the present have been able to throw away at least some part of their ambitions to believe that a new generation in all its variety matters.


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

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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