Focus: European stimulus and US stocks

Focus: European stimulus and US stocks
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Updated 06 June 2020

Focus: European stimulus and US stocks

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.

Background:

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


UN envoy calls for greater sense of urgency in Syrian peace efforts

UN envoy calls for greater sense of urgency in Syrian peace efforts
Updated 23 January 2021

UN envoy calls for greater sense of urgency in Syrian peace efforts

UN envoy calls for greater sense of urgency in Syrian peace efforts
  • Geir Pederson wants enhanced international diplomacy, and tighter focus on progress in drafting new constitution
  • The fifth session of the Small Body of the Syrian Constitutional Committee begins in Geneva on Monday

NEW YORK: Geir Pedersen, the UN’s special envoy for Syria, on Friday called for “more serious and cooperative” international diplomacy as part of political efforts to improve the lives of the Syrian people and develop a vision for the future of their country.

Speaking ahead of the fifth session of the Small Body of the Syrian Constitutional Committee, which begins on Monday in Geneva, he also urged committee members to focus their efforts and work more effectively to speed up progress on constitutional reform.

Pedersen expressed hope that much-needed international engagement with the peace process is now possible.

“After all, despite the differences, key states are continuing to reaffirm their commitment to Resolution 2254,” he added, referring to the UN Security Council resolution, adopted in 2015, that calls for a ceasefire and political settlement in Syria.

Pedersen, who briefed the Security Council this week on the latest developments, highlighted the fact that five foreign armies are active in Syria and “violations of Syrian sovereignty and territorial integrity (have been) going on for years.”

Although the ceasefire agreement reached by Russia and Turkey in the northwest of the country resulted in a de-escalation of hostilities, Pedersen warned that this relative calm remains fragile.

UN Special Envoy for Syria Geir Pedersen. (AP Photo/Kathy Willens, File) 

“All of these issues cannot be sorted out by the Syrians alone,” he said. (They) need an international cooperation (and) a real exchange of views (among all parties).

“If that political will is lacking it would be very, very difficult to move this process forward ... if you leave this to the UN alone, we will not be able to succeed.”

Top on the agenda on Monday will be discussion of the basic principles of the Syrian constitution. Pedersen said he has been meeting with the two co-chairs of the committee on a regular basis, and has also had intensive discussions with the “Middle Third” civil-society group, which includes society activists and experts and other independents from inside and outside of Syria.

His experiences during the past year, he said, lead him to believe there is potential for finding common ground. No single actor or group of actors can impose its will on Syria or settle the conflict alone — they must work together, he added.

The time has now come for the co-chairs of the Constitutional Committee to organize and focus its efforts by establishing “more effective and operational working methods,” Pedersen said, so that they can begin to move forward from preparing constitutional reforms to actually drafting them, and agreeing on clear agendas and discussion topics for future meetings.

“There needs to be more urgency (in) delivering progress in this process,” he added.

As he saluted the work of civil society groups and “all the Syrians who do what they can to improve the situation on the ground and support a political process,” Pedersen singled out women in particular for praise. He has been particularly proactive in seeking input from the Women’s Advisory Board.

“It is a priority for all of us to make sure that we have full participation of Syrian women in the political process,” he said. “(Promoting) their core constitutional rights is central for me, as the facilitator of the work of the Constitutional Committee.”

Asked about plans for large-scale prisoner swaps, Pedersen said that although this is not on the agenda for the talks in Geneva this week, it is always part of his own agenda. The disappointment over the lack of progress on the issue so far means “that we should work even harder” on it, he added.

“This is a file that really has an impact on nearly every Syrian family, and it needs to be addressed,” he said. “(I) have appealed (for) more information on the missing. (We) need to see the early release of women, children, the elderly and the sick, and I think (nothing) should stop that from happening.”

The members of the Small Body of the Syrian Constitutional Committee are due to arrive in Geneva on Saturday, and Pedersen will consult with the co-chairs over the weekend before the main talks begin on Monday.

Asked whether he expects this latest round of negotiations to be a success for the UN, Pedersen said: “I really do not think this is the question; the question (is) whether it is a success for the Syrian people and (their) aspirations.

“My hope has been that the Constitutional Committee, if it is handled in the correct manner, could start to build trust and (be) a door-opener for a broader political process.

“But the (committee) cannot work in isolation ... we need political will from the different parties to be able to move forward.”

He added: “The (committee) is just one aspect, and it is not the one aspect that will solve the Syrian crisis. If we are to see changes in the situation on the ground, there are other factors that need to be discussed.”