December 5, 2020

Confidence in central banks holds the stock exchanges in the maximum zone

The stock markets, which had reacted downward after the outbreak of the coronavirus in China, have changed the pace and, although uncertainty persists about the impact of the disease, they add up to two weeks in positive and remain in the maximum zone, a behavior that analysts link to trust in central banks.

In the oil market, prices are recovering due to the possibility that OPEC and other countries cut oil production; while in the field of foreign exchange, the euro remains at a minimum of almost two years compared to the dollar due to the weakness of key economies such as Germany or France.

As was the case during the Great Recession, central banks have once again become the last dam, in this case due to the foreseeable negative effects of the coronavirus on the world economy.

“Despite the coronavirus, markets are still embarking on an upward trend thanks, among other factors, to the stimulus provided by central banks,” says Adam Vettese, an analyst at the eToro investment platform.

Since the coronavirus crisis began, the People’s Bank of China – the central bank of the Asian country – has injected additional liquidity and has taken steps to boost the activity.

“What the markets are waiting for now is a greater stimulus, not necessarily from Beijing but possibly from the US Federal Reserve (Fed) and other central banks,” adds Vettese.

On February 11, Fed President Jerome Powell said the institution closely monitors the evolution of the Chinese coronavirus and admitted that the disease can negatively affect the world economy, which took advantage of US President Donald Trump , to claim more interest rate rebates.

Jeroen Blokland, of the Dutch manager Robeco, finds three reasons for optimism regarding the coronavirus: that in similar situations economic activity has recovered rapidly, that the world economy showed signs of improvement before the outbreak and that central banks They can act.

In his opinion, investors “must take into account the great flexibility of central bank policies.” Short-term interest rates remain low, or even negative, and central bank balance sheets are growing again, ”he explains.

According to Blokland, central banks “have the firm will to increase the stimulus in the event of a negative shock that endangers the world economy, such as the coronavirus.”

Another reason for not being pessimistic is the attitude of the White House towards China in this moment of difficulties.

“It seems that the White House will not show hostility to China while Beijing is fighting the epidemic,” says Gilles Moëc of AXA Investment Managers.

Moëc considers, however, that “evidence of significant economic upheavals because of the coronavirus” accumulates, although he points out that it is still difficult to quantify them.

The analyst points directly to Germany, which depends largely on Chinese demand.

The German economy stagnated in the fourth quarter of 2019 due to the fall in investment and the lower dynamism of consumption.

However, according to some analysts, Germany will benefit from the weakness of the euro, which will make its products more competitive.

According to a comment by HSBC economist Rainer Sartois collected by EFE Dow Jones, the decline in the euro “could give some support to German exporters” and counteract the negative effects of lower world demand.

As for the foreseeable evolution of the disease, AXA Investment Managers proposes three future scenarios.

In the most benign – rapid containment of the disease and poor dissemination outside China – the impact on the world economy would be 0.25 percentage points, while in the most negative – with prolonged production and circulation restrictions – the cut would reach four or five percentage points, which would lead to a global recession.

In the intermediate scenario – with a duration of the crisis of two quarters – the impact on the world economy would be 0.5 percentage points.


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