European Stimulus Plan Gives Markets More Momentum

Rising tensions with China did not dull the effects of a new fiscal stimulus proposal in Europe on markets, which compounded Tuesday’s gains.

MANHATTAN (CN) — Wall Street is primed for a second good day, as news of fiscal help in Europe helped markets build on Tuesday’s rally. 

At the opening bell, the Dow Jones Industrial Average gained 350 points, a 1.4% increase, while the S&P 500 and Nasdaq gained less than 1% each. European investors also built on the previous day. As of 9 a.m. EST, major markets on the continent all were up roughly 2%, while the pan-European Stoxx 600 gained just under 1%. 

The gains were driven by a new fiscal stimulus package in Europe. “Today it’s the Europeans that are driving the equity rally. We haven’t seen that in a while,” wrote Peter Boockvar, chief investment officer at Blakley Advisory Group in an investor’s note. 

In an effort to help struggling member countries, the European Commission plans to announce later on Wednesday a 750-billion-euro recovery fund, made up of both loans and grants. The fund still requires the approval of the European Parliament as well as several hold-out countries from northern Europe that want economic reforms attached to the money.

Paolo Gentiloni, the commission’s economic commissioner, tipped his hand on the announcement in a tweet where he wrote that the deal is a “turning point to face an unprecedented crisis,” according to a translation.

Boris Schlossberg, of BK Asset Management, wrote on Wednesday morning “the deal suggests that European authorities are serious about the need for debt mutualization in the face of the historic economic shock caused by the Covid-19 pandemic.”

Schlossberg and Boockvar both noted the Euro now equals $1.10, with potential for the value of the Euro to further pull away from the dollar if the deal goes through. “That resilience might say more about the dollar than the euro, [as well as] all of the dollar flaws as the largest debtor nation in the world,” Boockvar wrote.

In Asia, however, the specter of a new economic cold war with China still leers over markets. Protestors swarmed outside Hong Kong’s parliament Wednesday while lawmakers debated a bill to criminalize insults against China’s national anthem.

Markets in Mainland China and Hong Kong saw marginal drops on Wednesday, though most other Asian markets remained relatively flat, with Japan’s Nikkei gaining only 0.7% and South Korea’s Kospi barely inching over 0%.

Last week China announced it would ban secession and foreign interference in Hong Kong, threatening to end the “one country, two systems” policy that has been in place since 1997. That policy recognized Hong Kong as part of China but allowed the city to keep its own administrative systems and capitalist economy.

In a tweet Tuesday evening, Florida Senator Marco Rubio wrote that if China’s “rubber stamp legislature moves forwards on Thursday with blowing up ‘One Country, Two Systems,’” then the U.S. State Department “will have no option but to certify that HK is no longer autonomous & sanctions should follow.”

President Trump told reporters during a news briefing on Tuesday that he would take action against China later this week, but he declined to say whether such action would include sanctions or something more. “We’re doing something now. I think you’ll find it very interesting,” the president said.

For its part, China has said that the United States’ furor over Hong Kong is merely a “nothingburger” and that no meaningful action will be taken. “The White House claimed it would impose sanctions on China, but the tools and resources at its disposal are fewer than those it could mobilize before the outbreak,” the country wrote in an editorial in the state-run Global Times. “It is only bluffing.”

The United States already has taken several measures against China, including adding two dozen foreign companies to its “Entity List,” which prohibits them from exporting or transferring certain items, and scrutinizing four state-controlled telecommunications companies.

The Trump administration, which once lauded China’s handling of the pandemic, has increasingly blamed the communist country for the spread of Covid-19 and at times even insinuated it may have deliberately spread the virus.

More than 5.6 million cases of Covid-19 have been reported worldwide, of which 350,000 have died, according to data compiled by Johns Hopkins University. In the United States, more than 1.6 million people have contracted the virus, while 99,000 have died.