By: Wolfgang Jäggi
European equity markets started this new week negatively. Due to local holidays, the Japanese stock exchange will only open on Thursday and Shanghai on Wednesday. Last Friday, many European stock exchanges remained closed due to Labour Day. In that sense, these are a few messy weeks. Back to the negative start of both the week and the month. This is due to a few factors. First, there are of course the increasing concerns that Trump will announce a new round of import tariffs on Chinese products because it is very clear to him that the coronavirus escaped from a laboratory in Wu Han, China. U.S. Secretary of State Pompeo speaks in similar terms. Trump would also consider, as he did in September last year, no longer allowing an American government pension fund to invest in shares of Chinese companies.
Secondly, despite the minor easing of lockdowns that are being implemented here and there, it seems that the period of large-scale closures of businesses, tourism, catering etc. will last longer than it might at first sight seem. The fact that it is May and that a well-known stock market wisdom is ‘sell in May’, and we have all the ingredients for a false start to the new stock market month.
Meanwhile, the financial markets are not yet paying much attention to what the ECB announced during the official interest rate decision. There was more or less disappointment that Christine Lagarde did nothing about the official interest rates or the amount of bonds bought monthly by the central bank. But, a closer look reveals that nothing is less true than that. Under conditions banks can now ‘borrow’ a maximum of about 3.000 billion dollars from the ECB at a negative interest rate of 1 percent until mid 2021. That is a bigger step than ever taken by the bank and both the US system of central banks, the Fed, and the Bank of Japan have not (yet) gone that far. The condition is, however, that the banks use the offered space to provide credit to consumers and businesses.