By Eliman Dambell
The euro-zone countries have started responding to the rapid spread of the Coronavirus around the continent after further infections are reported. The UK saw 4 new cases of the virus, and Italy saw the overall infection rate double within a 24 hour period, as many of us begin to regret booking flights for our summer holidays to western European countries.
As a result European countries, Italy included have outlined potential fiscal policy changes which could help ease the pain of the crisis. So what exactly is the scale of the problem, and how do the Europeans plan to prevent this from causing even more damage to its citizens and businesses.
The market impact of this was evident last week as the EUR had its biggest rally against the USD since April 2017, as the currency rate went from $1.083 – 1.118 in a 7 day period of trading. European index markets also suffered considerably due to the strengthening of the currency, as we saw many Indices suffer huge levels of shorting. Traditionally as the currency of a region may increase, this impacts the outside demand from investors looking to buy or invest in said region, and that is what we saw take place. The DAX, which is Europe’s largest market index, dropped from 13540 – the 12000s, which was the largest drop since the 2008 crash.
Although short sellers may have benefited from these recent drops, the respective economies involved have suffered, leading to calls for the powers that be to “tackle the problem”, to allow people to go back to everyday life, without being fearful of possible infections. Slowing down of access to travel, which ultimately leads to difficulties getting to and from work.
With these panics surfacing not only in everyday life, but also into the markets, central banks and politicians scatter to find solutions to this ever growing threat.
So far the solutions have come from the central banks. The ECB have stated that they will remain “vigilant” and continue to monitor economic data and react where needed to potentially adjusting the economic instruments they are responsible for. So far since the comments from the ECB’s vice-chairman Luis de Guindos, we saw the release of the Euro – zone Consumer Price Index report which was forecasted at 1.2%. The report showed no change, which for now means the central bank may continue to hold on rate cuts until we see more of an impact.
Italy, on the other hand, is moving fast. Commiting €3.6 billion to the economy to help businesses most impacted by the spread of the virus. The aim will be to provide tax credits to businesses who suffered more than 25% drops in revenue within this period, with the hope that workers will not feel the pinch.
The G7 countries are also due to have a call this week to discuss the matter in more depth, with potential for joint economic intervention to prevent the markets moving in a similar fashion to what we saw in 2008.
Regardless of the outcome, markets have responded by so far consolidating in price movement, as they await further guidance on the solutions introduced. To see if they keep up with the pace of the problem, before we see a final, full scale ending of this story.