Morning Commentary: Close Doesn’t Count

Foreign Exchange - Morning Commentary
Close Doesn’t Count
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Yesterday, European Finance ministers, after a marathon 16 hour teleconference, failed to reach an agreement on a 500 billion euro package to alleviate the negative impact of the coronavirus.  Key issues include a dispute between Italy and the Netherlands over how the credit lines from the single market’s bailout fund can be used.  The finance ministers also disagreed on how to word the statement on the possible issuance of joint debt. 

Despite these disagreements, all sides agreed to keep talking, with German Finance Minister Olaf Scholz expressing optimism that a deal could be struck before Easter.  Nevertheless, the inability to strike a deal while facing what could be the deepest recession on record highlights how Europe is still stuck in the same old issues that nearly tore it apart during the sovereign debt crisis almost a decade ago.  This is why we, as well as many others in the markets, were not optimistic heading into yesterday’s virtual meeting. 

In many ways, yesterday’s decision by the ECB to ease collateral rules and to begin accepting Greek bonds could have been done in anticipation of a disagreement between countries on a fiscal response.  While the ECB’s most recent decision will provide relief to all countries in the euro area, it provides specific support to Greece, whose banks have struggled to raise funds as the nation’s sovereign bonds had been ineligible to be used in exchange for refinancing loans.  This is of particular importance as a failure to reach agreement on a strong fiscal response will put peripheral countries under the most pressure.

In recent commentaries, we have cited the stark contrast in decisive fiscal and monetary action taken in the US and other countries, with the lack of action in Europe as a reason why the euro will underperform.  Recent developments in Europe have only served to reinforce this concern.  In the US, the Fed and Congress have been acting aggressively while Europe continues to twiddle around.    
  • Divergence in virus data as well as how countries are handling the outbreak is starting to appear.  Many governments, including Italy, Austria and the US, are considering measures to ease restrictions on movement.  Conversely, France has announced a tightening of restrictions.  Data wise, Italy has reported its smallest amount of new infections in about a month while Germany reported its largest number in 3 days.  Spain also reported its highest number of new cases in 4 days.   
  • Democrats continue to work on the next round of stimulus that is nearly twice what the White House has been asking for.  The Democrats appear to be on board with the additional $250 billion in small business aid but also want $100 billion for healthcare and $150 billion for state and local governments. 
  • Standard and Poor lowered its outlook on Australia by giving the country’s AAA rating a negative outlook.  Reasons cited for the downgrade include a higher degree of uncertainty around domestic and global economic growth and elevated household debt. 
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