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LGT Navigator: Fed goes all-in

March 24, 2020

The US Federal Reserve (Fed) is firing from all pipes and announced a securities purchase program of unlimited scope to support the economy and stabilize the financial system. The stock markets immediately reacted positively to the Fed's announcements. On Wall Street, however, investors were disappointed that the US Parliament was unable to reach an agreement on a promised trillion-dollar rescue package. In Asia, by contrast, stock indices rose sharply and futures markets signalled a positive opening on European exchanges.

Fed goes all in

The Federal Reserve is fighting the coronavirus pandemic and its immense economic damage with all means at its disposal. After the Fed has already lowered key rates to zero, the Fed now wants to buy up US government bonds and government-guaranteed mortgage-backed securities on an “unlimited scale”. In addition, the Fed wants to indirectly purchase investment-grade corporate bonds and also acquire corresponding exchange-traded funds (ETFs) via a special vehicle. In addition, the central bank will launch several USD 300bn credit programs to support businesses and households. Federal Reserve Chairman Jerome Powell said that the additional measures announced yesterday were based on the massive damage expected for the US economy. The measures are designed to limit job and income losses and support the rapid economic recovery after the crisis.

Political trench warfare over US aid program

In Washington, the enemy Republicans and Democrats continue to fight over the details of a comprehensive aid package that is said to weigh at least one trillion US dollars. The Democrats are currently blocking an agreement because they fear that the money could end up in the wrong places, such as large multinational corporations ­ similar to what happened during the financial crisis of 2008/09.

The reactions on the international stock markets could not be more different: On Wall Street, investors were disappointed with the trench warfare in the US Congress. The Dow Jones Industrial and the broad S&P 500 closed around -3% lower than the previous day. Asian equities, on the other hand, were able to make strong gains today thanks to the tailwind from central banks. In Tokyo, the Nikkei 225 is up around +7% and in Hong Kong; the Hang Seng is trading at around +3.8%.

Meanwhile, governments in Europe are taking increasingly stringent measures to combat the spread of the coronavirus. After a long period of hesitation, the UK has also imposed a curfew, thus following the course of other European countries.

On a positive note, the exponential growth curve for coronavirus infections in Europe appears to be flattening out somewhat, according to the Robert Koch Institute (RKI) in Berlin. This could be due to the established restrictions in public life. However, the centre of the pandemic currently remains Europe and in particular Italy and Spain, where the situation remains extremely dramatic.

“Corona Bonds” in discussion

The European Central Bank (ECB) seems to be discussing the option of Eurobonds, or so-called “corona bonds”. Carlos Costa, member of the ECB Council and head of the Portuguese central bank, expressed the opinion that the ECB must find solutions to prevent a second debt crisis. “Corona bonds” issued by the euro bailout fund ESM would be a good way of doing this. EU Commission President Ursula von der Leyen has already expressed a positive view of joint bonds issued by the euro states.

Ifo expects immense damage to German economy

The damage to the German economy caused by the corona crisis could, according to the assessment of the Munich-based economic research institute Ifo, “exceed everything known from economic crises or natural disasters in Germany in recent decades”. Depending on the scenario, the economic costs of the measures taken to combat the pandemic could range from EUR 250bn (with a two-month partial standstill) to EUR 730bn (with a three-month standstill) and endanger more than one million jobs. In addition, more than six million people could be affected by short-time working.

Meanwhile, the German government is expecting a severe recession as a result of the Corona crisis. The slump in economic output will be “at least as high as in the global financial crisis of 2008/2009”. In 2009, German gross domestic product shrank by -5.7%. The Federal Statistics Office will publish the first figures on 15th May on the development of the GDP in the first quarter.

The Bundesbank is also expecting a “pronounced recession”. Nevertheless, the downturn is likely to be limited in time thanks to comprehensive government support measures, the central bank wrote in its monthly report published yesterday. Especially in the first half of the year, however, massive effects are to be expected.

Australia also launches aid package worth billions

The Australian government wants to cushion the negative effects of the corona crisis with aid measures amounting to AUD 84bn (EUR 45bn). In addition, another AUD 40bn is to be set aside as a reserve. Apart from wartime, the current crisis represents the greatest challenge for Australia to date, said Prime Minister Scott Morrison.



Economic Indicators March 24

MEZ Country Indicator Last
09:15 FR PMI Composite March 52.0
09:30 GE PMI Composite March 50.7
10:00 EZ PMI Composite March 51.6
10:00 EZ PMI Manufacturing March 49.2
10:00 EZ PMI Services March 52.6
10:30 UK PMI Composite March 53.0
14:45 US PMI Composite March 49.6
14:45 US PMI Manufacturing March  50.7
14:45 US PMI Services March 49.4

Earnings Calendar March 25

Country Corporate Period



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Source: LGT Bank (Switzerland) Ltd.

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