Challenging discussions

Last Wednesday, Ursula Von Der Leyen presented the European Commission’s recovery plan in the wake of that proposed by Angela Merkel and Emmanuel Macron. The announcement of this €750 billion recovery plan is supporting the single currency. It will be funded by large-scale borrowing by the European Union. Two-thirds will be redistributed in grants and one-third in the form of loans. To benefit from it, the States will have to draw up national plans specifying their needs and the planned reforms, which will have to be approved by the Commission and the other countries. Italy could thus receive more than €172 billion and Spain €140 billion. But the discussions will be arduous, and the plan is far from being ratified because it requires a unanimous vote of the EU-27. The so-called ‘frugal; countries (Netherlands, Denmark, Austria and Sweden) are hostile to any form of debt pooling which makes negotiations difficult.

The Commission’s announcement also eased the pressure on the Swiss franc. The euro has gone back well above CHF 1.0700, a level it had not reached since mid-January and the beginning of the crisis. SNB chairman Thomas Jordan reiterated once again that the institution is ready to intervene further to counter the valuation of the franc. His remarks come even as the Swiss National Bank has spent an estimated 70 billion francs on the markets, in two-and-a-half months, to prevent an excessive appreciation of the Swiss currency by defending the price of CHF 1.0500 against the euro.

For its part, the dollar is suffering due to a significant increase in COVID-19 cases in some American states, the sharp slowdown in economic activity and social tensions in recent days.  On the economic front, the figures reflect the damage caused by COVID-19. Durable goods orders fell by 17.2% in April after falling by 16.6% in March. The second estimate of GDP in the 1st quarter shows a 5% decrease against 4.8% previously. New claims for unemployment benefits, while lower with each passing week, were more than 2 million and home sales in progress have plunged 21.8%. While the Fed’s ‘beige book’, published last Wednesday, showed a rather bleak picture of the situation. The outlook for the US economy is very uncertain, and businesses in the country are mostly pessimistic about the potential pace of recovery. The companies contacted by the Fed expressed difficulties in getting their employees back to work, citing health concerns among other things. Interracial tensions in the country are also not helping to achieve a return to serenity.  The United States has experienced seven nights of rioting since the death of George Floyd. A week after the homicide in Minneapolis of the 46-year-old black man asphyxiated by a white police officer, New York, Los Angeles and dozens of other American cities have strengthened their security measures, decreeing or extending night-time curfews to empty the streets. Central Manhattan was looted Monday night, prompting the city mayor to tighten security. For his part, President Trump threatened to deploy the army if cities and states did not stop the violence.

The Central Bank of Australia announced yesterday that it would leave its key interest rate unchanged at 0.25%, as expected by the market. Governor Philip Lowe wanted to be reassuring by saying that he believed the magnitude of the economic downturn could turn out to be less significant than expected. But the speed of recovery remains uncertain, and the effects of the pandemic will be felt for a long time, he said.

Moody’s announced that it lowered India’s long-term rating to Baa3 following a persistent recession and growing debt. The outlook remains negative as GDP is expected to decline for the first time in 40 years. A future downgrading of the rating is, therefore, not out of the question.

This month will see several central bank meetings take place. Analysts are awaiting the European Central Bank meeting on Thursday to see if it will increase its asset buyback programme. Likewise, new economic projections on inflation and European GDP should be announced. The Bank of Canada is holding its monetary policy meeting today. We will have to wait until next Wednesday for the Fed and until the 18th for the SNB’s quarterly meeting.