Yesterday, European shares rebounded following fresh new monetary and fiscal stimulus, with Germany launching a €750 billion package to fight the coronavirus outbreak, coupled with the unprecedented steps announced last Monday by the US Federal Reserve aimed at helping markets function more efficiently amid this crisis.
As more countries worldwide continue to opt for lockdown and stricter measures to contain the virus spread, European business activity worsened, with the IHS Markit’s Eurozone Composite Flash PMI falling to a record low of 31.4 this month from February’s 51.6 (a reading below 50 indicates a contraction). The survey’s service sector business activity index hit 28.4 from February’s 52.6. This is the largest monthly fall in business activity since comparable data were first collected in 1998. The lowest reading of the Eurozone PMI prior to this month was seen in February 2009 during the financial crisis of 2008, when the index fell to 36.2.
Despite this, investors shrugged off this data with all major European indices recording significant gains whereby Europe’s Stoxx 600 was up by 7.5 per cent, Germany’s DAX +11.5 per cent, France’s CAC 40 +8.4 per cent, London’s FTSE 100 +9.4 per cent and Spain’s IBEX 35 +8.3 per cent. Italy’s FTSE 100 index also surged by 8.7 per cent and this may have also been positively affected by increased hopes that the most aggressive phase of the outbreak may be passing as Italy reported a two day decline in Covid-19 deaths.
However, after the market closed Italy’s reported deaths surged again and this may negatively impact sentiment as the virus continue to spread. The rally in European shares was boosted in the afternoon as investors grew hopeful that US lawmakers would be able to reach a deal on a massive economic stimulus that will combat the effects of the coronavirus pandemic. It was later announced that the US Congress concluded a deal on $2-trillion aid package.
US Senator Mitch McConnell said: “In effect, this is a war-time level of investment into our nation.” A draft version of the deal included several direct cash payments to households, with payments up to $1,200 for individuals, $2,400 for married couples and $500 per child. These payments are reduced if an individual earns more than $75,000 or a couple makes more than $150,000.
The deal also included a $350 billion fund for small businesses to support operations and mitigate redundancies. Such a reaction by investors was naturally expected following the substantial losses experienced by markets in recent weeks, with this being one of the fastest-ever turns to a bear market. Subsequent to yesterday’s rally the European Stoxx 600 index is still down 30.5 per cent since the recent record high.
Yesterday evening, the local government followed suit unveiling a new coronavirus aid package, with the government paying €800 monthly wage for workers in hard-hit sectors, including a second package of aid directed to companies hit by reduced consumption, with the government financing one day per week in wages, based on the above monthly wage of €800.
This substantial increase in government aid should mitigate the impact faced by those worst hit due to this outbreak, and also restore local investors’ confidence, which might result in a rebound of the local stock market (as at the time of writing the MSE Equity Price index is down by 21.4 per cent from recent highs).
Sustained use of monetary policy and increased money supply by the European Central Bank to stimulate growth, with interest rates already negative prior to the coronavirus outbreak, clearly showed that new tools were needed to mitigate the economic costs as a result of this outbreak.
It is assuring that in the face of such pandemic, governments are safeguarding public health and safety above the economy, with several extreme measures being employed worldwide. Nonetheless, in such delicate times it is equally important for governments to provide the necessary support to the economy and safeguard both the individuals and country’s financial health. Financial packages are targeting mainly health care services and providing the necessary support for business to retain employees and ensure that these will be able to jump-start operations once this virus is fully contained and we return back to normality.
Consequently, appropriate government intervention through fiscal policy targeting both households and business will soften the economic blow and restore investors’ sentiment, as health care professionals rush to develop a vaccine.
Disclaimer: This article was issued by Rowen Bonello, research analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.