- ECB meeting: now, fiscal policy has to play its part
ECB meeting: now, fiscal policy has to play its part
Friday 13 March 2020
Research / Market
At its meeting on 12 March, the ECB disappointed market expectations by not cutting rates in the wake of the coronavirus spread. The bank delivered additional unconventional monetary easing thorough a temporary boost to its QE programme, which will see a set of additional net asset purchases worth EUR 120Bn this year. Such purchases will be mainly skewed towards the private sector. In addition, the ECB will temporarily be conducting additional LTROs to provide immediate support to the Eurozone financial system while the ECB’s banking supervision will provide temporary capital and operational relief in reaction to the coronavirus outbreak.
Finally, the ECB supports the EBA decision to postpone the 2020 stress test so that banks can focus on business. Importantly, Ms Lagarde made a strongly worded request for “ambitious and coordinated fiscal policy”, as the response to the coronavirus-induced crisis should be fiscal first and foremost...
Global Investment Views - February 2020
At the start of the 2020s, markets continued to be dominated by geopolitical issues, with short-lived Iran tensions at the forefront initially, followed by the news regarding a phase one trade deal between the US and China. Now, growth expectations are becoming the main driver of the market. That’s why the recent volatility due to the news about the spreading of the corona virus in China is higher than in the case of US-Iran tensions, as the epidemic could harm China (and global growth) if not contained soon (not our base case at the moment). Other than this issue, recent data point to a ‘so far, so good’ assessment as Germany has avoided a recession and the Euro area is bottoming out. Inflation uptrends are materialising to some extent, but risks appear to be limited and the overall inflation outlook remains benign. Central banks are likely to continue to pause on policy changes, which should help to maintain dovish financial conditions across regions. Therefore, in the search for further growth, attention is globally moving towards fiscal measures: Japanese stimulus package; approval of 2020 Budget Laws for Indonesia, the Philippines and India; and hopes for support in Germany, the UK and broader Europe (€1tn European Green Deal).
Focus on fundamentals: virus volatility provides entry points for EM equities
Overview: The coronavirus has been the strongest driver behind the recent volatility in financial markets, providing the trigger for a break in the rally in risk assets, which had been running uninterrupted since October. We should be aware that the trough for markets could be well in advance of the peak of the epidemic, as markets tend to overreact at the beginning of a crisis and then stabilise and rebound, despite the continuation of the negative news flow.
Don’t panic: market overreactions may turn into opportunities for long term investors
The epidemiological characteristics of this pandemic (low mortality rate, probably much less than the 2% reported for the whole population and in any case less than 0.5% for the labour force) suggest that the impact of the epidemic should prove “short-lived” (first half of the year). An epidemic of this nature affects neither demography nor physical capital, provided that the policy mix is adequately calibrated, with a full mobilisation of fiscal tools.