Focus: EU deal on the 7-year budget, recovery fund

Gold bars and Swiss Franc banknotes are seen in this illustration picture taken at the GSA in Vienna. (File/Reuters)
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Updated 24 July 2020

Focus: EU deal on the 7-year budget, recovery fund

The week that was:
By mid-morning CET, all markets were down due to increased US-China tensions brought about by the closure of consulates in Houston and Chengdu, heightened rhetoric, and the global number of COVID-19 cases passing 15 million. The US, Brazil, and India head the sad league table.
The Nasdaq lost its weekly gains on fears of a tech bubble and US multinational Intel postponing the release of its 7-nanometer microchip.

Midweek, European markets had reacted positively to the EU’s 750-billion-euro ($870 billion) COVID-19 recovery fund but were dragged down by the overall market sentiment toward the end of the week.
Gold came within reach of $1,900 per ounce, reporting its biggest weekly gains since 1982. Veteran investor Mark Mobius told Bloomberg that he saw further upside to gold because of low-yielding sovereign bond markets and as a hedge against hitherto rallying equity markets as well as because of economic uncertainty induced by the COVID-19 pandemic.
Meanwhile regarding another safe haven the Swiss Franc: Switzerland may meet all three conditions to be declared a currency manipulator by the US: High trade and current account surpluses along with large-scale interventions. The Swiss National Bank has justified negative interest rates and interventions to avoid deflation. Negative interest rates are controversial within Switzerland. However, the Swiss economy is open, export-oriented, and faces a very high cost base, even without the constant appreciation of the Swiss franc.
Selected highlights from the earnings season:
Tech giant Microsoft’s quarterly revenue came in at $38 billion, growing by 13 percent and beating expectations. Earnings per share (EPS) stood at $1.46. The company’s Azure cloud computing service slowed by 12 percent compared to the previous quarter, and the stock fell by 3 percent after the announcement.
Despite reporting better-than-expected earnings over the last quarter, Intel shares fell 10 percent after the company announced that its 7-nanometer chips would be delayed by at least six months into the end of 2022 or early 2023. Revenues were $19.73 billion ($1.18 billion above consensus) and EPS beat forecasts by coming in at $1.23.
Coca-Cola’s global unit sales fell by 16 percent. Revenue was $7.2 billion in line with consensus and EPS beat expectations slightly with $0.42. CEO James Quincey called the second quarter the most challenging, because global lockdowns had impacted the hospitality channel of distribution. These observations were similar to PepsiCo’s, for the beverage part of the business. The latter has a snacks business, which had provided a hedge to the beverage part of the operations.
Norwegian petroleum refining company Equinor surprised by announcing a net income of $640 million, as opposed to an expected loss, on the back of a strong trading result. Unlike its competitors, Equinor had not revised downward its oil price expectations. Equinor CEO Eldar Saetre justified this on the expectation that underinvestment in the sector due to low oil prices might result in supply bottlenecks in the medium term.
Swiss pharmaceutical giants Roche and Novartis reported a lower net income for the first half (1H) and second quarter (Q2) of this year, coming in at $8.47 billion for 1H and $1.9 billion for Q2, respectively. Q2 sales were down 4 percent and 1 percent, which reflected the postponement of scheduled treatments due to the impact of COVID-19. The drug pipelines are on track. Roche maintained full-year guidance, while Novartis revised it slightly downward.
EU heads of government concluded their summit by agreeing a 750-billion-euro recovery package, split into 390 billion euros in grants and 360 billion euros in loans; as well as the seven-year budget amounting to 1.074 trillion euros.
The negotiations were marred by acrimony between the frugal states (Holland, Sweden, Denmark, Finland, and Austria) and the highly indebted southern nations of Italy, Spain, and Portugal, which were particularly hard hit by the pandemic. Germany, which holds the six-month rotating presidency, and France, acted as referees.
The package was vital to the cohesion of the union and to help the southern states through the economic impact of a health crisis which was no fault of their own.
The budget did not reflect the European Commission’s priorities of technology, digitization, innovation, health care, and the green deal. The two largest items were cohesion and agriculture. The European Parliament is demanding a reopening of negotiations before voting on the package.
The euro appreciated and European stocks rallied on the news of agreement at the summit. European stock outperformed some other markets ever since France and Germany jointly proposed a recovery fund. However, structural impediments in European economies remain and need to be taken into consideration.

Where we go from here:
US first-time jobless claims rose for the first time since March coming in at 1.41 million. The increased numbers reflected the economic impact of rising COVID-19 cases and sparked fears of a second wave.

The number is particularly troubling, because supplementary federal jobless benefits will expire at the end of the month, if Congress cannot agree on a package following the $2 trillion coronavirus response bill, known as the Cares act.
In May, the Democrats-controlled US House of Representatives had voted in favor of a $3.5 trillion Heroes Act, which the Republicans oppose. The Senate Republican leader said he was open to a package amounting to $1 trillion.
Meanwhile, Goldman Sachs’ CEO David Solomon warned on Bloomberg that additional stimulus was vital. He admitted to it being costly, but insisted it was still cheaper than dealing with the economic fallout which would ensue if Congress failed to agree.
Negotiations will resume next Monday.

— 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

American boy, 13, voices ‘sweet relief’ of rescue from Daesh

Updated 9 min 7 sec ago

American boy, 13, voices ‘sweet relief’ of rescue from Daesh

  • Matthew was taken to Syria via Turkey by his mother and stepfather in 2015
  • Matthew was forced to feature in a Daesh propaganda video in which he, aged 10, threatened Trump

LONDON: A boy who was taken to Syria by his mother and stepfather and forced to issue a threat of war on US soil to President Donald Trump has spoken of the “sweet relief” of being back home, one year after being extracted from a Kurdish detention camp.

While in Syria, Matthew, now 13, was taught how to disassemble assault rifles and build explosives, and was tutored by his stepfather about how to conduct a suicide attack against his would-be American rescuers.

Matthew was also infamously forced to feature in a Daesh propaganda video in which he, aged 10, threatened Trump: “This battle isn’t going to end in Raqqa or Mosul. It’s going to end in your lands … So get ready, for the fighting has just begun.”

Matthew told the BBC that it was a “sweet relief” to be back in the US. “It’s happened and it’s done. It’s all behind me now,” he said. “I was so young I didn’t really understand any of it.” Matthew is now living safely with his father Juan.

He was taken to Syria via Turkey by his mother Samantha Sally and stepfather Moussa Elhassani in April 2015.

Elhassani, who trained as a Daesh sniper in Syria, was killed in a suspected drone strike, and Sally was convicted this month of financing terrorism. She is facing six and a half years in jail.