Global Markets Overview: Europe
Updated: Sep 11, 2020
From 13 to 27 July 2020
For the week beginning July 13th, European stocks continued their strong recovery fuelled by further stimulus measures and consumer spending. Equity indices tested highs last seen at the start of June with the pan-European STOXX Europe 600 index ending the week 1.6% higher. Western European countries' major stock indexes performed relatively well, with Germany’s Xetra DAX 2.26% higher, France’s CAC 40 up 1.99%, and Italy’s FTSE MIB rising 3.24% [i].
Investors remained optimistic as European Union leaders met at a planned 2-day summit in Brussels on Friday morning to discuss the proposed recovery fund in response to the coronavirus crisis. The fund involves the European Commission borrowing up to €750 billion in the financial markets, to distribute grants and loans to countries that have been hardest hit by the pandemic. The recovery fund will remove some pressure on the European Central Bank, which has been responsible for much of the macroeconomic stabilisation throughout the Eurozone [ii]. It also adds an additional tool to the EU’s arsenal, to be used in the future in the event of an economic downturn. The downside of the programme is that it is likely to be a drain on future EU budgets. Furthermore, its effectiveness relies on directed investment spending by countries to boost demand and productivity. Otherwise, there is potential for crowding-out effects [iii].
After initial meetings, it looked unlikely that leaders would come to a compromise after talks remained in deadlock. Disagreement came over the size of the fund, distribution and conditions of either grants or loans [iv]. The frugal states including Denmark, Sweden, Austria, Finland and the Netherlands continued to insist on reducing the amount of non-repayable grants handed out to member states. Meanwhile, countries that were hardest hit by the coronavirus pandemic - Italy and Spain - maintain the position that the fund should be distributed by grants and are firmly against watering down the stimulus package. The summit concluded in the early morning of Tuesday 21st, marking it the second longest summit in EU history, with European leaders finally reaching a landmark agreement. The fund, now composed of €390 billion worth of grants and €360 billion of loans, will lead to an increase in federalism within the Eurozone [v]. The deal added to investor optimism and caused European stocks to soar, with pan-European STOXX Europe 600 index closing above its four-month high [vi].
The continued release of positive economic data throughout Europe and a strong start to earnings season boosted investor confidence. Ericsson was a standout performer with a higher than expected earnings and operating profits beating analysts’ expectations by 43% [vii]. The company also strengthened its position in the 5G sector, gaining 99 contracts in the second quarter, outperforming rivals. The company’s stock price was up over 10% during Friday's trading session [viii]. An upbeat earnings season and continued positive news from government stimulus measures are likely to reinforce the current bull market. However, the long-term outlook remains uncertain. A pullback may occur if positive news begins to slow during August and September now that stimulus deals have been reached. Investors will also be looking to reduce risk with the upcoming US election posing a threat to the bull market.
By John Taylor - Analyst at the York IFS Global Market Telegraph
This article was first published in University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 3.1 in late July 2020.
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