Global Markets Overview: Western Europe
By John Taylor, Analyst at the York IFS Global Market Telegraph August has been a relatively slow month for European stock markets influenced by low trading volumes, as investors take a break for summer. Signs of progress in the development of a vaccine for COVID-19 and the Euro nearing two-year highs against the Dollar pushed European stocks higher last week. Their steady rise continued with the pan-European STOXX 600 index ending up 1.02% higher . There is concern over the sharp rise in coronavirus cases throughout Europe, however major economies such as France and Italy have rejected the need for nationwide lockdowns which has increased investors’ confidence in a ‘v-shaped’ recovery.
Last week the French prime minister, Jean Castex, outlined the €100 billion recovery plan to be unveiled on September 3rd. He committed to a quick and powerful relaunch of the economy with continued corporation tax cuts and support for small and medium-sized businesses. France expects that €40 billion of its plan will be financed under the €750 billion EU recovery fund . Castex also promised to eliminate the public debt burden of the recovery plan within 5 years, which will be difficult considering the nationwide tax cuts. Investors welcomed the news of further stimulus measures and, subsequently, France’s CAC 40 index ended the week 2.18% higher.
The German economy has navigated its way through COVID-19 effectively and is now in better shape than many other European countries. The economic contraction in the second quarter was less than expected, with new figures showing the economy shrank by 9.7%, down from an initial 10.1% estimate . The government initially introduced greater stimulus measures and a shorter nationwide lockdown. Last week, officials extended the Kurzarbeit furlough scheme till December 2021 to keep workers on companies’ books. There are currently 88% of travel and tour operator companies on the Kurzarbeit scheme. The extension came as a relief to the travel industry — one of the hardest-hit sectors by the pandemic . The German finance minister on Thursday also announced a plan to raise €6 billion from the sale of a new 10-year green government bond. The proceeds will go towards green investments such as renewable energy projects. With Germany entering the market, it will provide a benchmark for bonds across the EU; as their debt is currently the safest in the Eurozone. This development is significant to encourage other countries to follow suit and represents a further move toward ESG investing .
With a lack of progress in recent Brexit negotiations, the EU Brexit negotiator, Michel Barnier, has said he was disappointed, reiterating that a deal between the two sides looked unlikely . The UK negotiator, David Frost, was unwilling to compromise on sticking points identified in the last round of talks over state aid and fishing rights. There has also been additional dispute over road transport and access for truckers. Now, the two sides are stuck with no sign of compromise. Wolfgang Munchau has rightly said ‘it is pointless trying to predict whether a deal will be made... and if a deal happens it will be last minute as always’ . EU capitals are yet to fully engage with the Brexit talks, having had to deal with recent COVID-19 measures and the recovery fund. The next round begins on September 7th, where it will become clearer whether the UK is heading towards a no-deal Brexit.
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 6 in early September 2020
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