Shrugs off German court news
The German courts didn’t necessarily say the ECB QE measures could not be done, but they do want more information to justify their actions. The European markets are shrugging off the decision and closing higher on the day:
- German DAX, +2.5%
- France’s CAC, +2.3%
- UK’s FTSE 100, +1.7%
- Spain’s Ibex, +1.3%
- Italy’s FTSE MIB, +1.73%
The judges reach a 7-1 ruling in the ECB QE case
Despite the ruling, the court says that some action by the ECB QE program partially violates constitution and that some of the action is held illegal i.e. not valid in Germany.
Adding that the ECB decision is not backed by the EU treaty. The decision can be found here
Although there are some caveats, I wouldn’t look too much into this. This just reaffirms that PEPP is going to be untouched, so the lack of suggestive price action means ‘let’s move on’.
I would argue that this is the key passage to take note of in the ruling above:
“Following a transitional period of no more than three months allowing for the necessary coordination with the Eurosystem, the Bundesbank may thus no longer participate in the implementation and execution of the ECB decisions at issue, unless the ECB Governing Council adopts a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme. On the same condition, the Bundesbank must ensure that the bonds already purchased and held in its portfolio are sold based on a – possibly long-term – strategy coordinated with the Eurosystem.”
That tells you the insane amount that governments are spending to try and prevent a long-term economic crisis
And the 40 million workers estimated by Bloomberg from each country’s furlough program only covers the six biggest economies in Europe. Roughly €100 billion has been spent to provide aid to workers during this time. That’s some perspective right there.
This unprecedented government support is mainly to avoid people losing their jobs, which could lead to more undesirable economic and social consequences in the long-run.
For governments all over the world, it is basically a choice of deciding between the lesser of two evils. They either bear the massive fiscal costs from the furlough programs or risk soaring unemployment levels that could lead to a more protracted economic downturn.
In any case, these programs can only do so much to help businesses and their employees.
There is no guarantee that some business models will be able to continue to operate and that we will see consumption activity return quickly over the next few months.
If that is the case, all this does is help to address short-term problems created by lockdown measures. However, the long-term problems caused by the fallout from the virus outbreak will be evident in time and that will see lasting pain for many around the world.
The University of Washington’s Institute for Health Metrics and Evaluation (IHME) is used by the White House
- has forecast a very sharp increase from its last estimate in mid-April
- due to rising mobility and the easing of social distancing measures in 31 states by May 11.
- revised forecast death toll to 135,000
- 3,000 to die each day by the end of May
Sad news indeed.
Pic is from an earlier Trump info session when the forecast had 100k as the minimum,
Coming up today, 5 May 2020 ,Germany’s constitutional court (in Karlsruhe) will announce its decision on whether the ECB’s public sector purchase QE program is legal under German law.
It seems likely the decision will accept the program as legal but it could nevertheless impose restrictions on what the ECB does
- ie. it may impose conditions for the ECB’s sovereign bond purchases that could impact the flexibly of policy.
Could be a EUR negative or at least prompt some volatility. A heads up.
A piece from Monday with comments from Keith Krach, undersecretary for Economic Growth, Energy and the Environment at the U.S. State Department
- “We’ve been working on [reducing the reliance of our supply chains in China] over the last few years but we are now turbo-charging that initiative”
Background to his comments:
Trump has stepped up recent attacks on China ahead of the U.S. presidential election
economic destruction and the massive U.S. coronavirus death toll are driving a government-wide push to move U.S. production and supply chain dependency away from China, even if it goes to other more friendly nations instead
A piece via Reuters on an internal Chinese report by the Ministry of State Security to top Beijing leaders including President Xi Jinping
- Reuters cite an unnamed source, and add: “Reuters has not seen the briefing paper, but it was described by people who had direct knowledge of its findings.”
- report presented early last month
- concluded that global anti-China sentiment is at its highest since the 1989 Tiananmen Square crackdown
- As a result, Beijing faces a wave of anti-China sentiment led by the United States in the aftermath of the pandemic and needs to be prepared in a worst-case scenario for armed confrontation between the two global powers, according to people familiar with the report’s content, who declined to be identified given the sensitivity of the matter.
We’ve been seeing a tick u0p in rhetoric aimed at China. most noisily from the US but it wider spread than that (Australia, for example).
Its been a factor in some of the risk unwind we have seen.