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Historic $860 Billion Pump is About to Send European Markets Flying

Last Updated September 23, 2020 2:08 PM
Joseph Young
Last Updated September 23, 2020 2:08 PM
  • The Eurozone will soon see a $860 billion stimulus package after a 4-day meeting in Brussels.
  • Europe’s stock market indices are surging, with Germany’s Dax index erasing losses from the pandemic.
  • The sentiment of investors is improving, as strategists say the new stimulus is a “game-changer.”

The European Union has finally agreed on an $860 billion stimulus package for 27 nations . The eurozone’s stock market is surging, with Germany’s Dax index and France’s CAC 40 index taking the lead.

The package would provide relief to the eurozone in the near-term, rescuing nations from a severe recession. Calls for a stimulus deal intensified when the European Commission (EC) predicted the eurozone’s recession would worsen. 

Europe’s Stock Market Indices Are Reacting, And So is the Dow Jones

On July 20, U.S. Treasury Secretary Steve Mnuchin said another round of stimulus is coming. It would include $1 trillion for kids, jobs, and vaccines , he said.

Merely a day after Mnuchin’s statement, the European Union finalized a massive stimulus package to offset the economic consequences of the pandemic.

The EC previously said that the recession of the eurozone would likely be worse  than the forecasts of analysts.

The gloomy outlook on the eurozone’s economy led Europe’s stock market indices to plunge.

When the EC released its report on July 7, Germany’s stock market index rallied from 12,616 to 13,286. It posted a 5.3% gain within less than three weeks.

Investors likely expected the European Union to introduce a new stimulus package, given the severity of the eurozone’s economic decline. 

The EC said in the first week of July:

At the global level, the still rising rate of infections, particularly in the U.S. and emerging markets, has deteriorated the global outlook and is expected to act as a drag on the European economy.

In pre-market trading, the Dax has surged by another 242 points, recording a 1.85% gain. On July 20, Germany’s stock market rallied by 1.83% as anticipation for the new stimulus grew.

Eurozone stock market
Germany’s stock market index Dax recovers from pandemic losses. | Source: Holger Zschaepitz 

“Pivotal Deal” Could Rescue European Stocks

The deal, which is unprecedented for the eurozone, could kickstart a strong economic recovery in Europe.

Ursula von der Leyen, the President of the European Commission, said the deal would allow Europe to emerge stronger from the pandemic. 

He said:

Europe, as a whole, has now a big chance to come out stronger from the crisis.

For now, investors are reacting positively to the agreement. The four-day discussions in Brussels seemingly improved the sentiment around the near-term trend of the economy and the stock market.

According to Emmanuel Macron, the President of France, the deal would double the budget of Europe in the upcoming years.

Relaxed financial conditions, a low-interest rate, and an aggressive approach from European leaders position Europe’s stock market for recovery.

Excess liquidity in the eurozone’s financial system indicates relaxed financial conditions. | Source: Jeroen Blokland 

Speaking to Financial Times, Morgan Stanley economist Reza Moghadam said the recovery fund is a game-changer for Europe. 

Germany’s stock market has already rebounded beyond March levels, fully recovering from the pandemic’s effect on equities. Moghadam explained:

We see the recovery fund as a game-changer for Europe, supporting a synchronised recovery and stronger growth over a sustained period, while making monetary union more stable and the euro more attractive.

Europe’s stock market found a breathing room in the form of a new stimulus package. As stocks in the U.S. and Asia steadily recover, hopes of a global equities market recovery are rising.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.