Global Markets Overview: Western Europe
By Luke Long, Analyst at the York IFS Global Market Telegraph
Optimism returns to European markets as a result of promising vaccine announcements and the US election result. ECB pledges extensive stimulus to avoid a double-dip recession across Europe.
Over the past two weeks European stock markets have rallied, along with global markets, after suffering the worst week since June the week prior. Fears of the impact of fresh lockdown restrictions across Europe have been replaced with optimism over a potential vaccine and a calmer trade environment under Biden. The confidence, accompanied with record breaking growth for the Eurozone, has seen a recovery of underperforming stocks to the detriment of high-flying stocks during the pandemic. European banks were significantly the best performing sector with the STOXX Europe 600 Banks index gaining 8% over the last week alone. Overall, European equities reached an 8-month high on Monday and the pan-European STOXX 600 index gained 12.5% over these prosperous last two weeks. These gains were observed across all of Western Europe, as Germany’s DAX added 4.78%, France’s CAC 40 climbed 7.45% and Italy’s FTSE MIB gained 6.21% all over the past week.
Approaching the US election and during the indecisive result, European markets were uncertain. This caused an initial influx of investment into European bonds with German 10-year bond yields initially plummeting as a result. The election of Biden as president of the US restored a degree of optimism to European markets. The confidence resulted in investors switching from bonds to equities which drove the surge in the European stock markets that we have seen over the past 2 weeks. The election result also poses an opportunity to reboot Europe’s trade relationship with the US which is particularly fragile after a 16-year dispute over state aid to Airbus and Boeing. The EU trade ministers met on Monday and discussed the possibility of a common transatlantic front with the Biden administration, which could drive European markets even further.
The COVID-19 pandemic, of course, remains a key concern for European financial markets. Over the past few weeks, the resurgence in COVID infections resulted in multiple European countries renewing restrictions and national lockdowns. Crucially these virus restrictions are less severe than those imposed during the first wave of COVID and, as a result, have set back the European economy less than it did in Spring. However, doubts investors had about the economic impact of these restrictions have been subdued after a potential vaccine was announced last week. Pfizer and BioNTech announced promising results from their vaccines in late-stage trials, followed by Moderna also announcing a vaccine that is said to be over 94% effective. “The more companies that can develop a vaccine candidate that can be shown to be effective, the more optimistic investors will be about being able to see a way out of this pandemic” – Michael Hewson (Chief Market Analyst at CMC Markets). The EU has finalised a deal to purchase 300 million doses of the COVID vaccines developed by BioNTech and Pfizer with the aim of providing a route out of the pandemic. The vaccine will be made in Germany and Jens Spahn (the German Health Minister) has pledged to purchase 100 million of these vaccines. It is expected that the vaccine will boost the German economy in particular and the German Council of Economic Experts has forecasted 3.7% growth next year. The vaccine announcements have been the key catalyst in driving European equities over the past few weeks.
Despite the optimism from the vaccine, Europe is still in a deep recession as a result of the pandemic and not much is likely to change this quarter. Many European firms are at risk of collapse despite subsidies and Euro Area unemployment rising to 8.3% from 7.2%, the highest rise on record in the Eurozone. Spain is noticeably the hardest hit country with the ECB estimating that one in seven Spanish workers are employed by a business that at risk of collapse. In response, the ECB has pledged to provide more stimuli in December in the form of expanding bond buying and providing cheap loans. More specifically, last week at the ECB’s annual symposium, Christine Lagarde (ECB President) stated that the ECB would expand its Pandemic Emergency Purchase Programme (PEPP). Most analysts expect it to extend to the end of next year adding around €500bn to the €1.35tn bond-buying plan. This extensive stimulus aims to prevent a double-dip recession in the European economy.
This article was first published in University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 12.1 in late November 2020.
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