Key takeways Most European Banks are resilient to the economic fallout from the Coronavirus crisis as they enter into the crisis with significantly improved solvency […]
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Macro focus: How resilient are the GCC economies to the coronavirus recession?
The GCC countries have been hit hard by the most severe macroeconomic shock in their history as independent nations. The collapse of oil prices earlier this year dealt a heavy blow to oil exporters all around the world. While some of the GCC countries are among the most wealthy nations on earth, the oil crisis caused their fiscal balances and their current accounts to deteriorate sharply in the face of the twin oil shock and demand crisis provoked by the coronavirus. Beyond some common features, there are disparities in terms of resilience to the crisis and capacity to deal with its consequences. Leaving appart the special case of Dubai and to some extent Bahrain, the GCC governments must accelerate their efforts to transform their economies.
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Markets & Geopolitics: Europe’s complicated pursuit of strategic autonomy
On June 17 2020, ahead of a tense EU-China summit, the European Commission published a white paper on levelling the playing field as regards foreign subsidies. The white paper is the result of a yearlong inflexion in EU’s foreign policy and economic doctrine in order to adapt the European Union to the realities of a Multipolar World by promoting a model of open strategic autonomy and by acknowledging China as a “strategic competitor” and as a “strategic rival”.
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Macro Focus: Discretion over rules. The Federal Reserve’s “puzzle and conquer” strategy
From its latest moves, it appears that the Federal Reserve has two important messages for the markets and for everyone else. 1. Don’t fight the Fed. 2. Don’t expect any guidance from the Fed.
These two messages are two facets of the same “puzzle and conquer” strategy that seeks to provide support to the economy and to the markets while preventing the spread moral hazard and the build-up of self-fulfilling market bubbles. This strategy is risky as it may err on either side by untertaining a haze of uncertainty over its course of actions. However, it is probably the best strategy as long as the macro outlook and the fiscal side of the policy mix equation remain difficult to project.
Markets & Geopolitics: The ORE of discord or the Battle for Rare Earths
Rare earhs could become a focal point in the coming trade battles following the scraping of that agreement. Several initiatives like Sen. Ted Cruz ORE legislation and Commerce Sec. Wilbur Ross inquiry into vanadium imports support this claim. We explain why the Battle for rare earths is a the heart of a reshaping of globalisation and an acceleration of the technology race in the wake of the coronavirus crisis.
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Market Focus: How long can the market rally last?
Despite all the macro projections that tend to discard a V-shaped recovery, the markets seem for now to price in such a scenario, perceiving the profile of the current recession to be more similarities with the 1991 and the 2001 recession than with the more severe recession associated with the GFC in 2007-2008. The probability of a sudden reversal in market sentiment following some unexpected bad news looks increasingly high. An abrupt end to the ongoing euphoria should not be dismissed. Hedging this potential outcome by buying equity puts or VIX calls might be a good way to prepare for this eventuality while preserving the gains achieved during this unprecedented rally.
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Macro Focus: ECB macro projections and the PEPP extension: shooting in the dark
Following the meeting of its Governing Council on June 4, the ECB announced an extension of its Pandemic Emergency Purchase Programme (PEPP) with an additional enveloppe of €600 billion. The total asset purchases made by the Eurosystem (ECB+ National Central Banks) to counter the coronavirus crisis including PEPP and additional APP purchases is now expected to reach almost €1.5 trillion. The bleak outlook for inflation shows the profound deflationary forces at work in the Euro area. Judging from the experience of the last few years, we believe the ECB’s assessment of an uptick in core inflation by 2022 to be too optimistic.
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Macro Focus: An analysis of the European Commission’s Next Generation €750 billion recovery plan
the European Commission unveiled a €750 billion “Next Generation” recovery programme (€440 billion grants, €60 billion guarantees and €250 billion loans) over the 2021-2024 period. The Next Generation programme would preallocate funds to the Member States prioritising the green and digital transitions mainly through the Recovery and Resilience Facility (€560 billion). It includes additional cohesion funding for €45 billion. As we show in our analysis, Italy, Spain, Poland, Greece, Romania and Portugal would be the main beneficiaries of this proposal which is likely to meet resistance from the “Frugal four” (Netherlands, Austria, Sweden, Denmark).
For the first time in EU history, fiscal expenditure would be financed through debt issued by the European Commission and backed by all the Member states, along the line of a French-German proposal. However, while this proposal is a welcome step toward fiscal integration, it is still short of a Hamiltonian moment for Europe”. The countercyclical policies needed to close the output gap left by the coronavirus crisis will still have to be conducted at the Member State level.
Macro Focus: Nowcasting 2020 Q2 GDP and forecasting Unemployment over the 2020-2022 period.
Our nowcasting model shows that US GDP might fall by -29% in 2Q 2020 and that unemployment might take up to three years to return to its pre-crisis levels. These results cast additional shadows over the assumption of a V-shape recovery for the US economy, which has already been abandoned by the Federal Reserve.
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Market Focus: Increased dispersion in Emerging Markets amidst an uncertain outlook
the economies of Mexico, Brazil, Russia, India, Indonesia, South Africa and Turkey have all been hit by the coronavirus crisis. EM currencies, equities and bonds have been particularly impacted by the global market fallout that occurred in February-March 2020. As has been documented by the IIF, Global investors pulled out their funds at record speed during that acute episode of market stress. Since then, the volatility of DM and EM markets has somewhat receded and the general sentiment toward risky assets has improved, not the least because the world’s major central banks committed trillions of dollars to support the markets and to put a de facto backstop on assets valuations . However, EM assets remains vulnerable to new waves of volatility and risk aversion that would trigger additional capital outflows.
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