Focus: European stimulus and US stocks

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Updated 06 June 2020

Focus: European stimulus and US stocks

What happened this week:

US first-time jobless claims for the week ending May 30 came in at 1.9 million. While the growth rate has been on a downward trajectory, the figure is still an extraordinary number. Unemployment claims have reached 43 million since the beginning of the COVID-19 lockdown. Non-farm payroll for May increased by 2.5 million bringing the unemployment rate to 13.3 percent, which is markedly lower than expected, because the private-sector services recovered 2.4 million jobs.

The US trade deficit in goods and services for April widened to $49.4 billion.

US-China tensions increased when American President Donald Trump’s administration threatened to suspend Chinese passenger flights to the US in response to Beijing barring American carriers from re-entering China. In response China has widened eligible countries and airlines when it eases it ban on foreign carriers. That may give access to some US carriers.

However, it is unclear if the current concessions will be sufficient from the US perspective not to jeopardize the US-China Civil Air Transport Agreement of 1980.

London-listed HSBC and Standard Chartered banks supported China’s controversial security law for Hong Kong alongside other big names such as Jardines and airline Cathay Pacific. While the move will land the two UK banks in disagreement with their government, HSBC gets a vast proportion of its revenues from the greater China area.

German airline Lufthansa’s supervisory board finally agreed to the government’s 9 billion-euro stimulus package. The company yielded to EU pressure and withdrew four planes each from Frankfurt and Munich airports. Lufthansa has undertaken a major restructuring program that will involve a headcount cut of between 10,000 and 20,000 people.

Lufthansa shares have dipped in value by more than 30 percent since the beginning of the year, bringing the company’s market cap down to $5.2 billion. The carrier is now 60th in terms of market capitalization and will leave the DAX after 32 years, because the index is reserved for the 30 largest German companies. Its replacement is property firm Deutsche Wohnen.


The European Central Bank (ECB) decided to leave interest rates unchanged and announced an additional 600 billion euros of bond purchases, bringing the total pandemic emergency purchase program (PEPP) to 13.5 billion euros.

ECB President Christine Lagarde never tires in highlighting the need for monetary policies to be supported by fiscal policy.

The European Commission plans to issue 750 billion euros-worth of bonds through the EU budget. This constitutes a de facto mutualization of that portion of pandemic relief to the economy. While some northern countries have reservations, it is expected that the package will pass in the end, especially as Germany starts the rotating six-month EU leadership on July 1. German Chancellor Angela Merkel and French President Emmanuel Macron are the architects of the plan’s precursor.

Merkel also made good on fiscal support in her own country: On Thursday, the German government surprised with a greater-than-expected 130 billion-euro stimulus equaling one-third of last year’s budget. It contains a 3 percent cut in value-added tax for 2020 and substantial sums allocated to bridge financing for small- and medium-sized enterprises, digital, security and defense spending, tax credits, support for municipalities, as well as a 300-euro credit per child.

A decade of expansionary fiscal policies and accommodating monetary policies to be financed by long tenors could be in store, which will have implications on the yield curve. These large packages are not just necessary to cushion the economic blow from the COVID-19 pandemic, they are also justified in light of the inflation forecasts from the ECB and other economists.

The ECB and proposed EU packages narrowed the yield differential between southern rim and northern European bonds.

The S&P 500 index is close to pre-pandemic levels despite high unemployment and amid violent protests in the aftermath of the death at the hands of US police of African American George Floyd. Yields reached their highest levels since 2000.

The big rally seen since the March lows are in part due to technology stocks outperforming the pack. Industrials, which are a good benchmark for economic performance, fared less well.

This is no surprise considering the COVID-19 outbreak is expected to wipe out a cumulative $15.7 trillion this decade, according to the US Congressional Budget Office.

The high unemployment numbers make a further stimulus package likely. Trump is said to favor spending on infrastructure as well as various unemployment and tax provisions. Its number is expected to be lower than the $3.5 billion the democratic-majority Congress passed last month. That package had included $1 trillion earmarked to support state and local budgets.

Where we go from here:

A meeting of OPEC+ failed to transpire on June 4 but a get-together is widely expected on Saturday. While Saudi Arabia and Russia have reportedly finally agreed on extending the current 9.7 million barrels per day of oil cuts for at least another month, the sticking point was non-compliance by several countries, especially Iraq and Nigeria.

Saudi Arabia, in particular, seems no longer willing to be burdened with a disproportionate share of the cuts in order to make up for the under-compliance of laggards. The various parties are rumored to get closer to an agreement.


— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.

Twitter: @MeyerResources

Coronavirus cases soar as Israel prepares tighter measures

Updated 32 sec ago

Coronavirus cases soar as Israel prepares tighter measures

  • Israel, a country of some 9 million people, now has one of the world’s highest rates of coronavirus on a per capita basis
  • The government reopened the economy too quickly, and a new outbreak has quickly spread throughout the summer

JERUSALEM: Israel on Wednesday reported a new record level of daily cases of the coronavirus, shortly before government officials were to meet to discuss tightening a new nationwide lockdown.
The Health Ministry reported 6,861 new cases on Wednesday as a raging outbreak showed no signs of slowing. Israel, a country of some 9 million people, now has one of the world’s highest rates of coronavirus on a per capita basis, and health officials say hospitals are quickly approaching capacity.
The government last week imposed a nationwide lockdown that closed schools, shopping malls, hotels and restaurants. The coronavirus Cabinet was to meet later in the day to discuss further tightening the restrictions.
Ahead of the meeting, Israeli Prime Minister Benjamin Netanyahu said that in light of the rapid spread of the virus, he would seek a “a broad general closure and significant tightening of restrictions immediately,” including the closure of large parts of the economy, his office said.
Israel won international praise for its handling of the outbreak last spring, moving quickly to seal its borders and impose a lockdown that appeared to contain the virus. But the government reopened the economy too quickly, and a new outbreak has quickly spread throughout the summer. The economy, meanwhile, has not recovered from a serious downturn caused by the first lockdown, and the new lockdown has led to a new wave of layoffs.
A new poll released Wednesday by the Israel Democracy Institute, a respected think tank, found that only 27% of Israelis trust Netanyahu to lead the country’s effort against COVID-19. That compares with 57.5% who trusted him in early April. The survey interviewed 754 adults and had a margin of error of 3.7 percentage points.
The Health Ministry has instructed hospitals to delay non-essential surgeries and to open additional coronavirus wards as the number of serious cases continues to rise.
Beyond further limiting economic activity, officials have been discussing shuttering synagogues and clamping down on protests — both of which risk sparking a public backlash.
The limits would come at a time when Israeli Jews are celebrating the High Holidays and when weekly demonstrations have been held against Netanyahu and his handling of the coronavirus crisis.
The ongoing protests have bitterly divided the country, with religious leaders saying their public is being unfairly targeted by restrictions on public prayer while Netanyahu’s opponents continue to hold large public demonstration. Demonstrators say Netanyahu’s supporters are using the outbreak as an excuse to muzzle their democratic right to protest.
Deputy Health Minister Yoav Kisch said restrictions would have to be tightened in the near future.
“Educational institutions will be closed, the economy will be limited to essential work, synagogues will have no indoor prayers, with arrangements for outdoor prayer, and demonstrations will be allowed without protesters traveling between cities,” he told Channel 12 TV. “Everyone will demonstrate where he wants, will pray where he wants and will stay at home. That is what is required now.”