European Equities Post Gains - What’s Moving Markets?

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Principal Points

• Gloominess looms on the European trading horizon
• The IMF highlights the need to support businesses

European markets opened higher on December 1 as the trading session began with the main indexes gaining about 1.00%. The FTSE100 is up over 1.50% in the early trading hours of the European session, followed by the Dax, up 0.90%, and the CAC40 up 0.85%. The market gains have almost erased the negative results from yesterday’s gloomy trading session in which some of the indexes closed to the downside by over 1.50%.

On the policy-making front, the Eurozone finance ministers yesterday agreed on a plan to revamp the bloc’s bailout fund. The bloc’s finance ministers met virtually during yesterday’s Eurogroup meeting and reached a deal to revamp the European Stability Mechanism (ESM), the fund that the EU set up during the sovereign debt crisis to help governments by providing them with bailout loans. The deal reached by the finance ministers creates a backstop for the bloc’s Single Resolution Fund so that it would provide extra cash for bank rescues from the ESM if the fund runs out of money. There are a few reasons why this deal is an important one. The first being that Italy and northern European countries finally came around to the reforms and second, this deal has the potential to pave the way towards dealing with more challenging issues in the EU’s banking union. The deal is not yet finalized as each Member State’s parliament still needs to approve it.

Cash Inflows Required for European Recovery

Cash Inflows Required for European Recovery In other news, The International Monetary Fund (IMF) published a report yesterday in which it urged the EU for more support to mitigate the risk of a double-dip recession. The IMF warns that the short-term outlook needs additional fiscal and monetary stimulus as European countries are considering easing restrictions before Christmas and allowing economies to return to a more normal state of functioning.

The fund expresses concerns by saying that the second coronavirus wave poses “a considerable risk” to the eurozone economy while also urging the European Central Bank to provide “solvency support” to businesses if bank lending was not available. The fund adds that European governments should start to think about how to transition from defending economies from the Covid-19 hit to providing support to viable companies who run the risk of going out of business.

The IMF also addressed the issues over the launch of the EU’s €750 billion recovery fund that is currently being blocked by Hungary’s and Poland’s vetoes. In the report, the IMF states that the recovery package could provide “a meaningful boost” to help European companies get back on their feet. Similar to the concerns raised by ECB President Christine Lagarde, the IMF warned that the longer the package is being withheld, the greater the risks will be for the European economic recovery.

Looking ahead, the ECB is scheduled to announce its latest monetary policy decision on Dec 10 as the market is already expecting that it will expand the €1.35T emergency bond-buying program and the €1.5T cheap loans policy to banks. On that topic, the IMF recommended that the ECB should consider a further cut in its deposit rate which currently stands at -0.50%.

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