Fiscal Policy To Help Weather Coronavirus Crisis

Fundamental analysis of Forex market

Market movers today

Key focus continues to be on the spreading of the coronavirus and policy responses both to contain the virus from spreading and mitigate the economic impact. US president Trump is supposed to unveil details about the economic emergency plan that is aimed at helping US companies and workers. Furthermore, after yesterday’s EU conference calls, European leaders are gearing up their efforts on the policy front as well and we should expect announcements tomorrow. Watch out for possible expansion of the Italian aid package, which could be doubled to an amount of 1% of GDP – for more details see Italy’s coronavirus crisis – Implications for the Italian economy, BTPs and Europe, 11 March.

With regard to the oil market, possible comments from Russia and Saudi Arabia are in focus as to whether the new price war between the two oil producers is continuing at full speed or one of them is about to blink.

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In Sweden, Prospera releases its broad-based quarterly inflation expectations survey. We expect a further decline in inflation expectations as actual inflation data has surprised on the downside.

Selected market news

In response to the coronavirus outbreak in Europe, EU Commission President Ursula von der Leyen in consultation with EU leaders yesterday unveiled specific measures to help the European economy weather the current storm. These include (1) flexibility in state aid rules and (2) EU fiscal rules under the stability and growth pact as well as (3) a specific coronavirus investment fund in the volume of up to EUR 25bn sourced from the EU budget that is planned to be operational already in coming weeks to support healthcare efforts, SMEs as well as vulnerable sectors.

The Danish government also announced fiscal policy measures to deal with the economic impact of the coronavirus. It will extend deadlines for payroll taxes and VAT, which could add DKK125bn (5.4% of GDP) to corporate liquidity. The uptake is likely to be far smaller, as companies with good liquidity will want to pay early to avoid negative interest rates. More measures will be coming, possibly targeting bank lending. So far, the government is waiting to see developments before deciding on whether to ease fiscal policy.

In the US, President Trump’s attempt to suspend payroll tax to help boost the economy has not received support from Congress, where both sides seem to favour a more targeted approach towards hourly workers and the travel industry.

Russia eased its stance on a potential oil price war yesterday, where Russia’s oil minister Novak said an OPEC+ deal could still be struck in May or June. Meanwhile Saudi Arabia continues to gear up for a significant output hike. It said it would raise output to full capacity in April and has apparently started booking super tankers to carry the oil. Brent trades in USD38-39/bbl this morning; hence, fear of a further increase in oversupply seems to have eased.