It was a big week on European data front last week as both the European Central Bank and European Council met. A number of important decisions and announcements were made that will shape Europe’s recovery in 2021.
First and foremost, the ECB announced another EUR 500 billion of stimulus, bringing the total amount to EUR 1.85 trillion. Also, the asset purchases programme will be extended until 2022 and deposit rate was unchanged at -0.5%. These extra measures are coming at the back of second wave of coronavirus spread in Europe, causing a number of member states to implement lockdown measures and restrictions on movement. European services PMI has been contracting after peaking in July 2020 at 54.7, and has been negative since September 2020, dropping to 41.7 in November. Shrinking economic activity is a concern for the member states’ governments as most countries are faced with high unemployment rate and low productivity, on top of aging populations. Euro Area has also been struggling with anemic inflation of -0.3% in September 2020. This means that ultra-low, or rather negative, interest rates are here to stay until we see economic activity and inflation picking up. The ECB has also indicated that TLTRO (Targeted Longer-Term Refinancing Operations) programme, offering cheap loans to European banks that have seen their balance sheets deteriorating in 2020, will be extended until 2022.
European Council meeting ended with mixed emotions. Poland and Hungary’s attempt to block 2021-2027 Multiannual Financial Framework and the EU budget, was dodged by introducing a supplementary declaration that addresses concerns of the former mentioned member states. EUR 1.3 trillion budget had been vetoed by Poland and Hungary on the premise of proposed framework infringing sovereignty of the member states. The veto had also blocked the implementation of EUR 750 billion coronavirus recovery fund which is critical to give the pandemic-battered economy the needed boost. European economy is expected to contract 7% this year, and recover 3.8% in 2021.
The markets have lost some of their optimism during last week as coronavirus cases are spiking across Europe and the US. Also, the latest announcements from Pfizer and BioNTech (AstraZeneca) have been sobering – most countries will not get the doses they need to vaccinate the entire population in 2020. Moreover, developed countries able to pay the bill are scheduled to get the batches shipped during the month of December, while the emerging world needs to wait until 2021. This puts additional pressure to the officials who decide which segments of population should be prioritized in terms of administering the vaccine. The U.K. and U.S. have indicated that front-line workers, along with people in high-risk groups, would be among the first to be vaccinated. Also, government officials and state heads ought to be vaccinated within the next month. The next step is convincing people to get injected- only around 63% of Americans would be willing to get vaccinated, based on WSJ. The number of sceptics is high, despite the fact that side effects of available vaccines have been muted. We are yet to see what approach is taken by governments and private companies, such as airline companies who have been among the loudest, advocating the vaccine.
Equity markets closed lower last week with S&P500 was down 1% and 2%. Gold ended flat at 1,837.81 and US dollar, measured by DXY, was also flat, closing 90.73.
Have a great trading week ahead!