Week Ahead Focus: Markets, stimulus packages, Eurozone inflation

Are markets too optimistic?

This week brought massive gains on the stock markets and yield premiums on the interest rate markets fell for the riskier investments. Spreads on Italian government bonds also fell. The markets have thus reacted to the abundance of countermeasures, such as the economic stimulus packages mentioned below and the massive support purchases by the central banks. In addition, there were signs in Europe that the spread of Covid-19 was slowing down, which additionally supported speculation that the protective measures would end in the foreseeable future. Finally, it should not be forgotten how much the markets were sold off before that. Nobody can predict how the infection figures will develop. At present, however, the markets have cause for cautious optimism, at least for Europe. In the US, on the other hand, the infection figures are still rising rapidly. However, developments in China and South Korea have shown that when new infections peak, the decline can be very rapid. We therefore certainly regard the recent price movements as speculative, but overall the outlook has improved with the measures taken and the course of the spread.

Stimulus packages against economic downturn

Eurozone – severe downturn in HY1

The comprehensive quarantine measures in all countries of the Eurozone to contain the spread of the coronavirus will cause a considerable economic slump in the first half of the year. We have therefore lowered our GDP forecast for the Eurozone for 2020 to -3.5%, before a recovery of +3.1% that should take place in 2021 (for details, see our EZ-GDP Short Note). Although the economic damage will be considerable, it should also be taken into account that all countries will provide substantial sums (up to 10% of GDP) to minimize the damage.

However, given the very different credit ratings of the Eurozone countries, the significant increase in new government bond issues required for this could lead to an increased divergence of yield levels within the Eurozone. In order to counteract this, the ECB has already decided on extensive new liquidity measures (for details, see the Weekahead of March 20, 2020). In addition, the euro finance ministers are considering the possibility that the ESM (European Stability Mechanism) could grant member countries with weaker credit ratings credit lines of up to 2% of the GDP of the respective country, so that overall we do not expect a significant increase in the financing costs of individual Eurozone countries - despite the fact that, in our estimation, the crisis measures in large Eurozone countries such as France, Italy and Spain will cause the national debt ratios to rise to historic highs by the end of 2020.

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