Morning Commentary: The European Problem

Foreign Exchange - Morning Commentary
The European Problem
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The euro finished last week down ~3% and as the worst performing G10 currency with markets in risk off mode.  Positive virus news over the weekend has the market reverting back to risk on today.    

On a broader level, stimulus measures appear to have brought some stabilization to the markets with volatility measures coming down.   Of note is the US’s decisive response via the Fed’s unlimited and open ended QE program and $2 trillion fiscal stimulus package.  In Europe, the ECB has stepped up with a Pandemic Emergency Purchase Programme but not all stimulus measures are the same. 

From a data point of view, good news continues to come out of Europe with Spain, Italy and France, some of Europe’s hardest hit countries, reporting declines in death rates.  This supports the view that distancing works and bodes well for the rest of the world.  If other countries, most of which have imposed lockdown measures, are truly a few weeks behind Europe, then they should also follow a similar path. 

However, markets remain highly uncertain and the collapse in economic activity should only get worse as lockdown measures continue/expand.  Keep in mind that distancing measures will still need to be in place, in some form, even after the virus is controlled.  Assuming economies start to re-open in the next couple of weeks, it will still take months before economic activity resembles normalcy.  This is why EU’s weak fiscal response is concerning. 

In my opinion, Europe needs a unified response.  The COVID-19 pandemic is an external shock that has hit the entire Eurozone and the Eurozone should deal with it as one entity.  One way to do this is through mutualization of debt, i.e. the issuance of joint debt to finance a more effective response.  While several countries, including France and Belgium, have supported this idea, several others (Germany, Austria, and the Netherlands) are strongly against it.  It is the inability for European authorities to agree on a strong fiscal response, among other factors, that should allow the USD to outperform the EUR.  
  • Positive virus news came out overnight with New York and New Jersey reporting declines in their death rates.  Similarly, positive headlines have also come out of Italy, Spain and France.   While recent headlines are positive, it is important to remember that the virus doesn’t move in a straight line.
  • Oil prices are off their session lows but are still down on the session as today’s OPEC+ meeting has been delayed to later in the week to allow more time for talks although headlines report the sides are “very, very close” to a deal. 
  • Germany’s Finance Minister wrote an op-ed piece in which he expressed the view that the European Stability Mechanism already allows for capital to be jointly raised. 
  • Japan has doubled the size of its next stimulus package to 108 trillion yen, and it will come in two stages.  The first stage will be aimed at limited job losses, and once the virus is under control, the second stage will be focused on creating a strong recovery. 
  • Singapore has also increased its support through a third stimulus package and Spain is expected to introduce a universal basic income package soon.
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