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LGT Navigator: Monetary and fiscal stimulus initiates historic relief rally

March 25, 2020

The US Federal Reserve seems to have successfully drawn a line in the sand and the agreement in the US Congress on a USD 2 trillion stimulus package caused a price fireworks display on the stock markets. On Wall Street, the Dow Jones Industrial index rose by more than 2 000 points (+11.4%), the strongest increase since 1933! The recovery on Asian stock exchanges is also continuing and the futures markets are signalling a positive opening in Europe.

Monetary and fiscal stimulus initiates relief rally

The unprecedented and, in their dimension, historic monetary and fiscal policy measures taken in the fight against the corona pandemic now appear to be providing a certain amount of ground on the financial markets. After a dramatic sell-off, the leading index of the New York Stock Exchange was able to make up for the heavy losses of an entire trading week in one day yesterday. This was triggered on the one hand by the latest further aid measures announced by the Fed and the USD 2 trillion economic stimulus package approved by the US Parliament. The extremely optimistic statement by US President Donald Trump at this point in time also made the stock market optimistic that the US economy would be brought back to full speed as soon as possible. The recovery rally in Asia is continuing. In Tokyo, the benchmark Nikkei 225 index is gaining around +8% and the Hang Seng index in Hong Kong is trading up around +3%.

Nevertheless, the recovery on the stock markets follows brutal losses in the previous weeks and should not hide the fact that the crisis is not over. Moreover, the negative effects on the global economy will continue to be felt for a long time to come.

According to the World Health Organization (WHO), the epicentre of the coronavirus pandemic could soon shift towards the United States in view of rapidly rising infection figures. On the other hand, there is hope for Italy that the infection curve will gradually flatten out. Meanwhile, the situation remains dramatic, particularly in Spain and Italy.

G7 call for increased cooperation in the corona crisis

The finance ministers and central bank governors of the seven most important industrial nations (G7) announced that they would strengthen their cooperation in the corona crisis and improve their coordination in order to respond to the health, economic and financial consequences of the crisis. The G7 (US, Canada, France, Germany, Italy, Italy, the UK and Japan) will do whatever is necessary to restore confidence and growth in the economy and protect jobs, businesses and the resilience of the financial system, the statement released yesterday said.

Leading indicators confirm expected economic crash

According to preliminary survey results of the London-based market research institute IHS Markit, the US economy suffered its worst slump in March since August 2009 due to the coronavirus pandemic, with the purchasing managers' index (PMI) for the private sector, i.e. the service and industrial sectors combined, falling from 49.6 points in February to 40.5 points. The services sector was hit particularly hard, with the PMI plummeting from 49.4 in the previous month to 39.1 in March. According to IHS Markit chief economist Chris Williamson, the latest survey results underscore the fact that the US economy is already in a recession, which will deepen even further.

The IHS Markit survey results for the euro area also showed how strongly the corona pandemic is affecting business sentiment. The purchasing managers' index for the service sector in the euro zone, in particular, slumped by 24.2 points to 28.4 in March. The decline was thus even more pronounced than analysts had expected at 39.0 points. In the industrial sector, the Purchasing Managers' Index slipped to 44.8 points from 49.2 to its lowest level since July 2012. According to Markit Chief Economist Chris Williamson, business activity in the entire euro area collapsed in March to an extent not seen even at the height of the global financial crisis.

In Germany, the Purchasing Managers' Index for service providers fell to 34.5 points, the lowest level since the survey began in mid-1997. In February, the indicator still stood at 52.5 points. The unprecedented slump shows that the German economy is facing a severe recession, commented IHS Markit. The head of the German Council of Economic Experts, Lars Feld, also expects a severe recession in the current year due to the corona crisis. Unlike the Munich Ifo Institute, which fears a slump in gross domestic product of up to -20% in a pessimistic scenario, Feld said that the assumption of a decline of more than -10% was too pessimistic. Germany's economics minister Peter Altmaier stressed that the EUR 750 bn aid package initiated by the German government was only a first step. One should not lose sight of the prospects for a new upswing after the crisis, Altmaier said.

Japan's economy also appears to be facing another drastic slump. According to the latest survey results, the Purchasing Managers' Index for the world's third largest economy dropped from a low of 35.8 points in February to 11.2 points in March as a result of the global virus crisis. The PMI has thus reached its lowest level since the tsunami disaster of 2011, and the postponement of the Olympic Games is now making the situation even more difficult for the plagued service sector.

Nike seems to be in good shape despite corona crisis

Despite substantially lower revenues, especially in China, the US sporting goods manufacturer Nike was able to exceed market expectations in Q3 due to the corona crisis, and the share price rose by around +5% after trading. Nike was able to benefit above all from increased online business. In Q3 (ending February) the company reported a net profit of USD 847m, down -23% from the same period last year. Earnings per share were 53 cents (previous year 68 cents), above analysts' expectations of 51 cents. Total revenues increased to USD 10.1bn from USD 9.61bn in the previous year (consensus USD 9.81bn).



Economic Indicators March 25

MEZ Country Indicator Last
10:00 GE Ifo Business Climate Index 96.1
10:30 UK Consumer Prices (y/y) +1.8%
10:30 UK Core Consumer Prices (y/y) +1.6%
13:30 US Durable Goods Orders (m/m) -0.2%
14:00 US FHFA House Price Index (m/m) +0.6%

Earnings Calendar March 25

Country Corporate Period



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