Today's trading session in Asia, the start of the session in Europe and indications from US futures contracts show that there was great optimism on the markets. It seems that sentiment is improved by subsequent aid packages for the economies of individual countries. On March 24, Nikkei 225 increased by more than 7 percent, and the Australian ASX gained more than 4 percent. In Europe, DAX increases by more than 4 percent, and American futures contracts are traded on almost 4 percent higher.
The main event for investors could be the decision of the US Federal Reserve on Monday (March 23, 2020). The Fed announced that it is introducing unlimited purchase of bonds and MBS (mortgage-backed securities). Purchases have no amount or time limit. The Fed will buy as much and as long as needed. However, this is not all. The Federal Reserve will also support the flow of credit to employers, consumers and enterprises by establishing new programs that together provide up to USD 300 billion of new funds for this purpose. Further, the Fed will be able to buy on the secondary market corporate bonds issued by US investment grade companies and ETF investment funds listed on the US stock market, whose investment objective is to ensure broad exposure to the US investment grade corporate bonds market. Furthermore, in addition to the above steps, the Federal Reserve may soon announce the establishment of a business loan program to support lending to eligible small and medium-sized enterprises.
In Germany, in turn, the government agreed to an economic stimulus package worth EUR 750 billion to counteract the negative economic effects of the coronavirus epidemic. The Berlin government expects a pandemic to drive the economy into recession, and current assumptions are built on the expectation that GDP will fall by 5 percent in 2020. Preliminary PMI reading for manufacturing in Germany pointed to the 15th consecutive month of decline in activity in this sector. The indicator fell from 48 to 45.7 points. In turn, the service PMI fell to 34.5 points, noting the steepest contraction in history. In this way, the lowest readings from the Great Financial Crisis have been deepened. However, the reaction to March data is not visible, because currently, announcements of extraordinary actions are more important than the state of the economy in March. Nevertheless, the data clearly show that a pandemic is much worse for the economy than the crisis from over a decade ago.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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