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Collinson FX: July 22, 2020 - Europe approves massive bailout after 5 day meeting

by Collinson FX 22 Jul 05:41 PDT 23 July 2020
Ariki - 2020 Mahurangi Regatta - Mahurangi Cruising Club - January 25, 2020 © Richard Gladwell / Sail-World.com

Collinson FX: July 22, 2020 - Europe approves big bailout

The EU passed a massive bailout/stimulus package, after a record five day meeting and heavily contested negotiations. The EU agreed to a EUR$750 Billion bailout, which is a heady mix of grants and loans to members heavily impacted by the pandemic, while sharing the responsibility for the debt. The members also agreed a record 7-year budget, post-Brexit, which consolidates the integrated political union. This is seen as a landmark event, which breaks new ground, making debt a collective responsibility. This could signal the beginning of the end, as heavily indebted nations lean on the fiscally responsible. The EUR spiked to 1.1530, while the GBP jumped to 1.2760, following positive developments on the vaccine front in the UK.

Rising market confidence is being assisted by vaccine developments and positive economic data, which is reflected in global equity markets. This has also allowed the safe-haven US Dollar to beat a retreat, with the AUD spiking to 0.7130, while the NZD jumped to 0.6630. The RBA minutes revealed that many alternative monetary options were being considered. The Central bank had discussed debt monetisation, negative interest rates, FX interventions and private sector asset purchases. Members endorsed longstanding principles separating monetary policy from the financing of Government. Hallelujah! Most Central Banks do not have the principle or courage to maintain traditional monetary policy convention, with most funding Government debt through monetisation, which corrupts market interest rates and will have long term repercussions.

The commodity currencies have been major beneficiaries of a falling reserve and busted through technical ceilings. The local currencies have broken out and market confidence remains key, while trade remains a serious Geo-Political risk.

Collinson FX: July 21, 2020 - Markets lift on vaccine news

The EU summit entered a record fourth day overnight, with leaders negotiating into the early hours of the morning. This is the longest summit in history as leaders negotiate the next 7-year budget and the all-important EUR$750 Billion bailout/stimulus package. The Bailout package is a potent mix of grants and loans, while the mechanism for repayment remains contentious. Collective responsibility for the debt has been proposed and this is where the ‘frugal’ nations have objected. In addition to the massive bailout is the 7 year budget. This has seen enormous increases in member nation contributions, due to Brexit, which has been bitterly argued.

Markets suffered the impasse, but were bolstered by progress news of a vaccine out of Oxford. This was a boon to markets, along with recent progress from Pfizer and BioNTech, with their respective vaccines. US Coronavirus infection and hospitalisation rates, continue to hit record levels in Southern US States, threatening the economy wide re-open. The EUR rallied to 1.1430, while the Yen slipped back to 107.30, driven by expanding trade deficits. Japanese Exports contracted 26.2%, while Imports fell only 14.4%, increasing the deficit.

The positive moves on markets have allowed the safe haven Dollar to ease, which has a seen the AUD reach 0.7000, while the NZD consolidated above 0.6550. NZ Services PMI reached 54.1, a bounce back to expansionary levels, reflecting the reopening of the domestic economy. The virus spread, treatment and vaccines all remain important drivers of global markets, although warnings over global relations with China remain. The US Secretary of State is off to the UK to discuss further action to combat the perceived Chinese recalcitrance.

Collinson FX: July 20, 2020 - Second wave overlooked by markets

Markets closed the week flat, after posting strong gains in equities during the week, despite surges in virus infection rates in the USA. Markets are overlooking surging ‘second wave’ infection levels, as Government’s in the US and Australia re-impose restrictions, in an effort to contain the virus. The EU are meeting to green-light a EUR $750 Billion bailout/stimulus, with the majority of member states supporting the emergency measure, although there are members who could sabotage efforts? The problem is not the stimulus package, but the collective responsibility for debt repayment! The EUR jumped to 1.1435, while the Yen traded 106.90, as the Dollar settled.

US markets are battling the explosion of ‘second wave’ infections, while news on treatments and vaccines continue to support positive sentiment. The real threat to global markets is the Chinese geo-political situation. The aggressive Chinese foreign policy has drawn push back from western nations. The US, UK and Australia have led responses to the Chinese behaviour in Hong Kong and now may be about to address the part the CCP played in the global pandemic. The rhetoric is becoming more accusatory and defined and there is talk that CCP members, could be banned from travel to the USA!?

China remains central to the global supply chain and vital to the trade exposed commodity nations. Markets have shrugged off the virus and are forward looking, allowing the safe haven status of the US Dollar, to lessen. This has allowed the AUD to regain 0.7000, despite the ‘second-wave’ of the virus and lock-down in Melbourne, while the NZD looks to regain 0.6550. The EU meeting to decide the viability of the bailout/stimulus package could determine the mood of markets when they re-open the new week.

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