Global Markets Overview: Western Europe
By Luke Long, Analyst at the York IFS Global Market Telegraph
Eurozone business activity declines sharply as extended lockdown measures and vaccine distribution issues across Europe incite fears of a double-dip recession.
Despite the global markets' buoyancy following the election of Biden and the European leaders welcoming the presidency after the 4-year turbulent Trump tenure, European markets have made marginal gains throughout January. The STOXX Europe 600 Index climbed around 2.5% [i] during the first week of January, as a result of a successful Brexit deal with the UK. For the rest of the month, European equities were roughly flat due to fears of extended lockdowns and a severe downturn in business activity in Europe.
In recent weeks, multiple countries across Europe reimposed lockdown restrictions in response to the arrival and rapid spread of the highly infectious mutated strain of COVID-19. The UK imposed an indefinite national lockdown, which could last until mid-year, Germany prolonged its strict lockdown until mid-February, and the Netherlands imposed the first national curfew since WW2 [ii]. Three days of intense rioting in major Dutch cities followed the lockdown announcement in which nearly 500 people were detained [iii]. These stringent lockdowns across Europe are dragging European countries towards a double-dip recession with Eurozone business activity contracting for third month in a row, according to the Purchasing Managers’ Index [iv]. This is the sharpest drop across Europe since November, with the UK experiencing its steepest depreciation in business activity since May [v]. In addition, the record infections and lockdowns during January saw unemployment levels across Europe increasing for an eleventh consecutive month and the consumer confidence indicator across the Eurozone area falling 1.7 points to -15.5, which is significantly below the long-term average of -11 [vi].
After meeting this month, the ECB opted for a wait-and-see approach of keeping interest rates unchanged at 0.0% and standing ‘ready to act’ [vii] in response to the rapidly increasing infection rates across Europe. The ECB also left its PEPP quota at €1.85 trillion with the buys to run to at least until March 2022 [viii].
The European Union signed a deal in August for 300 million doses of the COVID-19 vaccination and was expecting 100 million doses in the first quarter of 2021 in order to stem the high infection rates and new strain of the virus [ix]. However, over the past week, due to production problems, AstraZeneca and Pfizer-BioNTech have both warned that they are falling behind on their targets and this expected amount is no longer feasible. Reports state that the vaccine manufacturers will struggle to supply just half the originally agreed amount in the first quarter [x]. This limited supply of vaccinations has caused panic and incited fears of hoarding and protectionism across Europe [xi]. In particular, executives at BioNTech reported to the Italian government that they would be receiving just 3.4 million doses in the first quarter as opposed to the 8 million previously agreed [xii]. As a result, Italy’s Prime Minister, Giuseppe Conte, stated he will consider ‘all legal steps’ in an attempt to sue the vaccine companies over the delayed doses. These supply disruptions have led to mounting tensions between the pharmaceutical companies and the European governments, which is far from ideal given the current circumstances. Conte has since resigned, after losing his majority in the Senate, resulting in a split COVID response [xiii]. Although there are talks of Conte forming and leading a new coalition government to run Italy, the political unrest will hinder Italy’s response to the vaccine distribution issues.
This article was first published in University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 14.1 in early February 2021.
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Reference list: [i] https://www.stoxx.com/index-details?symbol=SXXP [ii] https://www.troweprice.com/financial-intermediary/us/en/insights/articles/2021/q1/global-markets-weekly-update.html#europe [iii] https://www.reuters.com/article/us-health-coronavirus-netherlands-protes/calm-returns-to-dutch-cities-after-riots-with-police-out-in-force-idUSKBN29V0RC [iv] https://tradingeconomics.com/euro-area/composite-pmi [v] https://www.ft.com/content/9c80b6db-4469-4be0-ac1b-f8a9db69ea1e [vi] https://tradingeconomics.com/euro-area/consumer-confidence [vii] https://www.cnbc.com/2021/01/21/european-stocks-higher-as-bidens-presidency-begins.html [viii] https://tradingeconomics.com/euro-area/interest-rate [ix] https://www.bbc.co.uk/news/world-europe-55805903 [x] https://www.ft.com/content/3dbfe495-5947-4dd0-9f43-5edc5e6d6dc7 [xi] https://www.reuters.com/article/us-health-coronavirus-vaccines/enthusiasm-over-covid-19-vaccines-tempered-by-talk-of-protectionism-and-hoarding-idUSKBN29V1F0 [xii] https://www.ft.com/content/4cd7e919-9f4a-4404-b5c8-cad3952101f9 [xiii] https://www.bbc.co.uk/news/world-europe-55802611