LUXEMBOURG
OLIVIER GOEMANS

For a moment, it seemed the sky was falling for risk assets but last week, the S&P 500, the NASDAQ and the Euro Stoxx 600 indices were back at all-time highs. Even markets in Asia, a continent gripped by the tragic coronavirus, managed to gain ground. There are various sources of this newfound sentiment.

Central Banks as a perpetual safety net

Markets seem to believe that central banks will always be ready to protect their respective economies from whatever it may be: coronavirus, trade or any other risk. The People’s Bank of China stepped in last week with a massive liquidity injection of Rmb 1,2tn (173 billion dollars). Central banks in The Philippines and Thailand cut interest rates while Singapore’s monetary authority signalled that its currency could depreciate in response to the outbreak. In the US, the market is now pricing two Fed rate cuts this year, despite projections that points to no changes and a statement from the Fed describing its current policy mix as «appropriate». Central banks are somewhat locked into accommodative stances, faced with stubbornly low inflation and tepid global growth. Investors seem to be willing to bet that central banks will not do anything that could cause trouble inside of financial markets.

Cupid’s tariff cuts

On Valentine’s Day, China will cut taxes on 75 billion dollars worth of US imports. The arrow is aimed mainly at agricultural goods: pork, beef and chicken will see levies cut from 35% to 30% and soybean duties will fall from 30% to 27.5%. Additionally, tariffs on American crude oil will be lowered from 5% to 2,5%. A Chinese finance ministry spokesperson commented that this should «boost market confidence, promote bilateral relations and help global economic growth». The US will reci-procate by halving tariffs on some Chinese goods according to the office of the US Trade Representative.

This is not entirely new news as both nations agreed to cut

tariffs on each others’ goods as part of the Phase 1 deal signed

last month. However, markets are warmed by the commitment demonstrated by the cuts.

President acquitted

Political risk also subsided after US President Trump evaded impeachment. The US Senate acquitted Donald Trump on both articles of impeachment, abuse of power and obstruction of Congress. Albeit, from a financial market point of view, this was already taken as a given, as it would have required an unrealistic two-thirds majority in the Republican controlled chamber to convict the President.

Benign Eco Data

Survey data gauging the general mood in the corporate world (before the coronavirus outbreak) indicated that the global economy had been faring well. However, where certain risks recede, there always seem to be new ones popping up. While the overall US trade deficit narrowed for the first time in six years amidst Trump’s tariffs on China, Americans turned to other countries for goods. The trade deficit with the EU and Mexico hit new records. Indeed there is a risk, especially for Europe, that this draws the protectionist gaze of the White House. Further still, in Germany, the Thuringia branches of the FDP and CDU parties leaned on the far-right AfD to prop up their minority government. This is controversial as it is seen as giving ground to a populist party. It has divided opinions across the country and could trigger new elections.

But for now, these concerns have barely left a trace on markets which seem to be becoming pretty good at brushing things under the carpet. •

BIL

La plus ancienne banque

Fondée en 1856, la Banque Internationale à Luxembourg (BIL) est la plus ancienne banque universelle du Grand-Duché. Depuis sa création, elle joue un rôle actif dans les principales phases du développement de l’économie luxembourgeoise. Elle exerce aujourd’hui les métiers de banque de détail, banque privée et banque des entreprises et participe aux marchés de capitaux. Avec plus de 2.000 collaborateurs, la Banque est présente au Luxembourg, en Suisse, au Danemark, en Suède, et au Moyen-Orient et en Chine.

www.bil.lu