Change in the air

Jun 30, 2020 | Jay Zhang


The past several years had seen the grand European experiment put to the test. And then when COVID-19 swept in, it faced a fresh threat.


We are upgrading our stance on European equities to Market Weight from Underweight as several key developments appear to be afoot on the continent.
Two events in particular mark a departure from the status quo. First, the EU’s joint response proposal to lend a hand to those countries most affected by the COVID-19 crisis suggests a step towards greater fiscal union. Second, Germany has shed its parsimonious past and is embracing fiscal spending. What’s more, both of these are happening amid a backdrop of very accommodative monetary policy from the European Central Bank (ECB).

A crisis focuses minds

According to an old adage, crises tend to focus minds. This has certainly been borne out across Europe. In March, Northern Italy became the initial epicentre of the COVID-19 crisis, with new daily cases spiralling out of control. Lockdowns were imposed as the virus swept across the continent.


National governments responded swiftly by announcing spending programmes, some of them particularly ambitious, to support their respective economies. The ECB announced a new quantitative easing programme.

But financial markets were underwhelmed. The risk was that without a collective EU-wide response, the lack of apparent solidarity for those countries most affected by the crisis could fuel anti-EU sentiment. After all, why give up control of your domestic currency and abide by EU rules if you’re going to be abandoned in a time of distress?


Market pulse
3 Volatility spikes bode well for future S&P 500 returns
3 Canada stripped of AAA credit rating
3 Encouraging signs of economic activity in the UK & EU
4 South Korea battling fresh virus clusters


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