“The EU Lays Out A Rescue Plan…”

The EU Lays Out A Rescue Plan

A plan was unveiled on Wednesday to support the economies that were hammered by the pandemic, hoping to end months of disagreements.  Under the proposal, the EU Commission will borrow the funds from the market and then disburse two-thirds in grants and the rest in loans to support the economy’s slump. Most of the money will go to the European economies most affected by the pandemic such as Italy and Spain.  The grants are needed because Italy, Spain, Greece, France and Portugal already have high debt and these countries are dependent on tourism. The latter sector has been hard hit by the pandemic. The 500 billion euros are in line with the wishes of France and Germany who came up with a grants-only proposal last week.  Meanwhile, French Finance Minister Bruno Le Maire said on Thursday that he hoped that the European Union could reach a deal on the package in the weeks to come.  There was positive reaction from Paris, Berlin, Rome and Madrid as well as the European Parliament and the Chairman of the EU leaders said they should aim to finalise an agreement before the summer break.  Whilst detailing the plan, Ursula von der Leyen spoke of “Europe’s Moment: Repair and Prepare for the Next Generation” that aims to fulfil the Commission’s pledge to cut EU Carbon emissions to “net zero” in 2050, increase EU health and defence capability, and support firms facing solvency problems.  The recovery fund is in addition to the 2021-2027 EU long-term budget which the Commission proposed to set at EUR 1.1 trillion.  The plan needs unanimous backing from the 27 EU states and the European Parliament, but according to the EU leaders’ chairman Charles Michel it would first be discussed on 19 June.  

Germany

A drop in capital investments, private consumption and exports pushed the German economy into a recession in the first quarter, data showed on Monday.  According to the Federal Statistics office capital investments fell by 6.9 percent, private consumption by 3.2 percent, and exports by 3.1 percent between January and March when compared to the last three months of 2019.  This shows that private consumption took off 1.7 percent of the overall economic activity and net trade cut off 0.8 percentage points, implying a first quarter contraction of 2.2 percent, the steepest since 2009.  The data showed that investments in the construction sector which accounts for 10 percent of the overall national output and is Germany’s largest employer, climbed by 4.1 percent contributing 0.4 percentage points to quarterly growth.  The data showed that government expenditure increased by 0.2 percent on the quarter.  The 2.2 percent decrease in quarter-on-quarter output was the widest since the financial crisis of 2008 and the second biggest since the German reunification in 1990.  Meanwhile, German business morale has rebounded in May, a survey showed on Monday, recovering from its most drop in the previous month. The Ifo institute said in its May’s survey that its business climate index rose to 79.5 from a downwardly revised 74.2 in April. 

Christine Lagarde About Europe’s Economy

The Eurozone’ economy is likely to shrink between 8 percent and 12 percent this year amid its struggle to overcome the impact of the coronavirus pandemic according to European Central Bank President Christine Lagarde.  Whilst earlier the ECB said that the economy could shrink by between 5 percent and 12 percent, speaking in a youth dialogue, Lagarde said that the mild scenario is already outdated and the actual outcome would be between “medium” and “severe” scenarios. 

US Weekly Job Claims

The number of Americans filing for unemployment benefits held above 2 million last week for a 10^th straight week amid job cuts by US state and local governments as budgets were decimated due to the pandemic and a second-wave of layoffs in the private sector.  Data on Thursday further indicated that the economy was spiralling deeper into recession illustrating that business spending on equipment plummeted in April.  Furthermore, the economy contracted in the first quarter at its steepest pace since the recession of 2007-2009.  Meanwhile, data about the housing market, manufacturing and consumer spending indicate a collapse in gross domestic product in the second quarter at a pace last seen during the Great Depression.  According to the Labour Department initial claims for state unemployment benefits totalled a seasonally adjusted 2.123 million for the week ended 23 May from a revised 2.446 million in the prior week. 

China’s Parliament Approves Hong Kong National Security Bill

A potential deterioration in relation between the world’s two biggest economies could raise the pressure already weakened by the coronavirus pandemic on global businesses and oil demand.  Words of war between China and the US escalated over the Hong Kong Issue. The US is taking a more series response to the proposed Chinese security law that threatens the long-standing independence of Hong Kong.  The US secretary of State, Mike Pompeo stated on Wednesday that China’s plan to impose laws was “only the latest in a series of actions that fundamentally undermine” the former British colony’s autonomy and freedoms.  Meanwhile the US is preparing a range of options to punish China over the tightening measures on Hong Kong including sanctions, tariffs and restrictions on Chinese companies. On Wednesday Secretary of State Mike Pompeo delivered a report to Congress declaring that Hong Kong was no longer autonomous from China.  The shift in the status of Hong Kong impacts the favourable trade relationship with the United States which so far it meant that Hong Kong has been spared the tariffs that have been the main trade war with China.   On Thursday China’s parliament approved directly an imposing national security legislation on Hong Kong to tackle secession, subversion, terrorism and foreign interference.  A city that last year was roiled by anti-government protests for months.  The National People’s Congress voted 2,878 to 1 in favour to empowering its standing committee to draft the legislation.  There were six abstentions. 

Japan

On Wednesday Japan’s government compiled a new $1.1 trillion stimulus package to keep the pandemic from pushing the economy deeper into recession which will be funded by an additional 32 trillion yen in fresh bond issuance.  Under a policy dubbed yield curve control, the BOJ guides short-term interest rates at -0.1 percent and the 10-year bond yield around zero via aggressive bond buying.  It is also buying risky assets such as ETFs to keep markets stable and issue money to support the economy. 

Market Wrap

On Monday stocked edged higher after a survey showed German business morale has rebounded in May raising optimism as the economy re-opened.  The pan-European STOXX 600 index climbed 0.8 percent.  Meanwhile, financial markets in Singapore, Britain and the US were closed due to a public holiday and market moves were relatively small and held within ranges.  US stocks jumped and the S&P 500 breached the 3,000 points on Tuesday amid optimism about a potential coronavirus vaccine and a revival in business activity that diverted investors from the Sino-US tensions.  All 11 S&P sector indexes gained in early trading comprising cyclical financials .SPSY, industrials .SPLRCI and energy stocks .SPNU, climbing more than 3 percent. The S&P has increased about 37 percent from its March lows amid central bank and government stimulus and is now just about 11 percent below its February record high.    Britain’s FTSE and Japan’s Nikkei 225 led their regions with 2.2 percent gains.  Europe’s STOXX 600 .STOXX reached near 11-week high.  Travel and leisure stocks climbed almost 6 percent after Spain had said that quarantine-free tourism would resume next month, and Germany edged towards a 9-billion-euro bailout of airline Lufthansa.  Meanwhile, Italian, Spanish and other southern eurozone government bonds gained.  World stocks climbed on Wednesday as the reports of a European Union rescue fund helped to offset the negative news about the unrest in Hong Kong over Beijing’s proposed national security laws.  Eurozone government bond yields edged down from Tuesday’s highs as investors waited for proposals about the EU recovery fund.  Also, on Wednesday the S&P 500 edged higher in choppy trading, over a pick-up in business activity that helped offset the worries over the US-China tensions.  Gains were capped by losses in technology stocks. The latter which recently led the rally were down 1% and 2 percent.  Besides technology, healthcare stocks that were the outperformers during the pandemic period were in the red amongst the S&P sectors.   Bank stocks which track the trend in economic outlook, provided the biggest boost to the benchmark index, sending it above the 3,000 points mark in intraday trading for a second day.  Facebook Inc FB.O and Twitter Inc TWTR.N fell 2% and 3.3%, respectively, as Trump threatened to shutter social media companies a day after Twitter prompted readers to fact check some of his tweets. Travel-related stocks such as airlines, cruise companies and hotel operators climbed between 2.4 percent and 4.5 percent after taking a beating earlier in the year amid the halt in global travel.  Asian shares slipped on Wednesday as investors were concerned about the rising tensions between the US and China.  Hong Kong shares led the declines amongst the major regional indexes with Hang Seng dropping 0.46 percent, and Japan’s Nikkei was almost flat.  On Thursday stocks erased the gains reached earlier in the day after President Donald Trump stated that on Friday, he would be holding a news conference on `China`.  The Dow Jones Industrial average closed at 25,400.64 (a drop of 0.6 percent), the S&P 500 dropped to 3,029.73 (falling by 0.21 percent) whilst the NASDAQ declined to 9,368 (a drop of 0.5 percent). 

US:  The Beige Book

The ‘Beige Book’ which is the Fed’s survey, was conducted in April when non-essential businesses were in shut down through 18 May, and some states started easing the restrictions.  In the report the FED said that “Economic Activity declined in all districts, falling sharply in most.” It further added that “although many contracts expressed hope that overall activity would pick up as businesses reopened, the outlook remained highly uncertain and most contacts were pessimistic about the potential pace of recovery “.  In order to lessen the effect of the shutdowns and the job losses, the FED acted in an aggressive manner to support the economy. These actions included the central bank cutting its key overnight interest rate to near zero in March, engaging in open-ended asset purchases and announcing emergency lending tools to support both households and businesses.  Furthermore, Congress passed nearly $3 trillion in economic relief to channel funds to individuals and businesses affected by the pandemic.  The report clearly shows that despite the easing of restrictions, businesses are still struggling. 

Currency Roundup

The commodity-linked Canadian dollar strengthened to a two-month high against its US counterpart on Tuesday as steps to reopen the world economy raised investor sentiment.  The euro got a boost on Tuesday from a weaker dollar over growing optimism about a global economic recovery from the coronavirus pandemic.  Furthermore, the trade-sensitive Australian and New Zealand dollars and Norwegian crown each rose more than 1 percent versus the US dollar.  Meanwhile, the Chinese yuan, a barometer of US-China relations, was mostly left behind by a rally in other Asian currencies.  The pound rose against the dollar and the euro on Tuesday moving above $1.23 for the first time in 13 days, amid improving risk appetite that saw the dollar drop.  The pound was also boosted by a Reuters report that the European Union is willing to shift its stance on fisheries in negotiations on the future relationship of Britain with the EU.  Against the euro, the pound reached 0.89 pence up around 0.4 percent. Early in the week, Prime Minister Boris Johnson has set out plans to ease Britain’s coronavirus lockdown, including restrictions on retail, if government tests were met. Sterling dropped $1.23 on Wednesday as the dollar regained strength.  Investors also focused on the possibility of negative interest rates in Britain.  On Tuesday Bank of England Andy Haldane played down the prospect of imminently taking rates into negative territory, stating that “reviewing and doing are different things.”  Euro continued to climb on Thursday boosted by the EUR 750 billion EU plan to support the EU’s economies hit by the pandemic. It reached $1.1016 having risen earlier to a two-month high of $1.1035.  Against the swiss franc it was steady at 1.0664 although the previous day it rose to nearly a three-month high.  Gains were however limited over doubts about delivering the scheme. 

Oil

Oil prices rose on Tuesday amid growing confidence that producers are following on commitments to cut supplies, as fuel demand picks up and lockdowns are eased.  Brent crude was up 1.4 percent at $36.01 a barrel while US West Texas Intermediate crude futures gained 2.3 percent to $34. Oil prices dropped on Wednesday after US President Donald Trump on Wednesday said he was working on a strong response to China’s strong security law in Hong Kong.  Brent crude fell 1.3 percent to $35.70 a barrel while US West Texas Intermediate crude dropped almost 1 percent at $34.03.  On Thursday oil prices plunged after US industry data showed an increase in oil inventories, lessening the hope of a smooth recovery in the demand for oil as some countries begin to ease their lockdowns.  The decline in oil benchmarks continued after the losses from Wednesday amid uncertainty over Russia’s commitment to deep cuts ahead of OPEC + meeting to be held on 9 June.  US West Texas Intermediate crude futures were down 3 percent at $31.83 a barrel whilst earlier US futures dropped by 5 percent to $31.14.  Brent crude futures were down 2 percent at $34.03 per barrel after dropping to as low as $33.63. 

Gold

Gold Prices rebounded from losses as some investors played it safe with the spot gold unchanged at $1,710.9 per ounce.  Gold on Thursday rebounded as the deteriorating relations between the US-China increased its appeal as a safe asset.  

Malta:  Retail Price Index in April 2020

In April 2020 the annual rate of inflation (measured by the Retail Price Index (RPI) stood at 0.83 percent a lower figure compared to the 1.11 percent in March 2020.  The largest upward impact on annual inflation was measured in the Food Index, whilst the largest downward impact was the Recreation and Culture Index. 

Malta:  Industrial Producer Price Indices:  April 2020

Comparing the industrial producer price index of April 2020 with the same period in 2019, the index rose by 0.6 percent.  This rise is attributed to increases in consumer goods and capital goods by 1.89 percent and 1.33 percent respectively, while intermediate goods dropped by 0.34 percent.  There was no movement in the price in the energy sector.  Meanwhile on a month to month comparison in April 2020 the industrial producer price index increased by 0.17 percent over the previous month.  The increase occurred due to a rise in consumer goods and intermediate goods of 0.55 percent and 0.01 percent respectively.  Meanwhile, there were no price changes in the capital goods and energy sectors. 

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