50 or 75 bps Rate Hike: Markets Split Over Size of Next Week’s BoE Move

Key Points

  • UK inflation surprised (slightly) to the downside on Wednesday, with headline CPI falling back under 10% YoY.
  • But economists still expect it to hit 11% in October as energy prices rise.
  • Market participants are split over whether the BoE will hike rates by 50 or 75 bps next week.

UK August inflation figures surprised to the downside on Wednesday. The YoY rise in the Consumer Price Index fell unexpectedly for the first time in a year to 9.9% from 10.1% in July, versus expectations for a modest rise to 10.2%. Core CPI came in as expected at 6.3%, up from 6.2% a month earlier. Meanwhile, Producer Price Index figures also surprised to the downside.

Whilst the (modest) fall in the headline YoY inflation rate will be seen as good news for the BoE, which has been raising interest rates aggressively in recent months to cool the economy as inflation surges, economists do not think UK inflation has yet peaked. In October, a new household energy tariff cap kicks in and is likely to push the headline YoY inflation rate above 11%.

Indecision Over Size of Next Week’s BoE Rate Hike

While UK money markets are currently pricing in an 80% chance that the BoE hikes interest rates by 75 bps next week and only a 20% chance of a 50 bps move, most of the economists who partook in a recent Reuters poll said they think a 50 bps rate hike is more likely. That could complicate GBP’s reaction function to next week’s rate announcement – traders may be unsure as to whether to sell GBP on a 50 bps rate hike or whether or not to buy it on a 75 bps move.

What’s clear is that, with Wednesday’s inflation figures showing the price pressures, while a tad lower than expected in August, remaining elevated at multi-decade highs, the BoE has plenty of work to do regarding further rate hikes if it wants to keep inflation expectation anchored and get back to its 2.0% target in the coming years.

Traders have been upping their bets as of late as to where UK interest rates will peak next year, with rates now seen reaching around 4.5%. Contributing to the recent upshift in BoE tightening bets has been the recent announcement of new fiscal support by the UK government.

The UK government looks set to borrow at least £100 billion to help households/businesses pay for their energy bills. While a government cap on energy costs incurred by the public means a lower expected peak in UK inflation in the months ahead, it also reduces downside risks to the UK economy, which may contribute to core UK inflationary pressures remaining elevated for longer, thus requiring a stronger tightening response from the BoE.

Marketmind: Trillion-Dollar Tesla

LONDON (Reuters) – A look at the day ahead from Sujata Rao

The news was less cheerful from Facebook which is contending with whistleblowers and falling popularity among the young. But a $50 billion buyback plan, unveiled after market close, may be enough to lift the shares on Tuesday, especially if fellow tech titans Google, Microsoft and Twitter also post upbeat figures.

All in all, the global equity index is inching back towards the record highs hit early-September. U.S. stock futures pointing north for Tuesday and Japanese markets added 1.8%. In Europe, a surprise 9% profit boost at UBS — its highest in six years — could see the pan-European banking index rally further past April 2019 highs.

But the supply-chain snarl-ups, container traffic jams and chip shortages bedevilling companies worldwide show no signs of going away any time soon.

Just take carmaker Hyundai, which missed profit estimates and predicted that the chip shortages hampering output would take a long time to fix. And French car parts maker Faurecia saw Q3 sales drop 10% as semiconductor shortages forced its customers to cut production.

Then there is the prospect of central bank policy tightening, with the Bank of England looking set to join rate-hike club next month.

It all adds up to slower economic growth and earnings, Citi reckons. That could see buy-side analysts switching to net “downgrade” mode on stock recommendations for the first time since the pandemic first hit, it added.

And don’t forget China, where another developer Modern Land missed paying a bond due on Monday. Shanghai and Hong Kong shares fell, despite gains for EV firms.

Key developments that should provide more direction to markets on Tuesday:

-Philadelphia Fed Nonmanufacturing Business Outlook Survey

-U.S. monthly home prices Aug/consumer confidence Oct/new home sales Sept

-U.S. 2-year note auction

-Europe earnings: Norsk Hydro posts record Q3; Reckitt Benckiser ups full-year f’cast after upbeat Q3; Logitech sales rise on work-from-home boom

– -U.S. earnings: 3M, Corning, Eli Lilly, General Electric, Hasbro, Invesco, JetBlue, Lockheed Martin, S&P Global, United Parcel Service, Xerox, Google, Microsoft, Texas Instruments, Twitter, Visa

(For graphic on Tesla – https://fingfx.thomsonreuters.com/gfx/mkt/jnvwewzegvw/Pasted%20image%201635194081739.png)

(Reporting by Sujata Rao; editing by Karin Strohecker)

Political Firestorm Drops Facebook to Four-Week Low

Facebook Inc. (FB) is trading at a four-week low in Monday’s pre-market after pushing back on White House accusations that COVID-19 misinformation on the platform is “killing people”. The allegation set off a political firestorm in the United States last week, with conservatives accusing President Biden of seeking control of the online service in order to silence critics. Meanwhile, liberals are backing the President, frustrated by a long-standing contentious relationship with CEO Marc Zuckerberg.

Pouring Gasoline on the Political Fire

White House press secretary Jen Psaki ignited the political controversy on Thursday, alleging that Facebook is “not doing enough to stop the spread of misinformation about the virus and the COVID-19 vaccine”. Biden poured gasoline on the incendiary criticism ahead of the weekend, insisting “They’re killing people. I mean, it really – look, the only pandemic we have is among the unvaccinated and they’re killing people.”

Facebook fired back this morning, insisting it “was not the reason the 70% vaccination goal was missed”. The release noted that “data shows that 85% of Facebook users in the US have been or want to be vaccinated against COVID-19. President Biden’s goal was for 70% of Americans to be vaccinated by July 4. Facebook is not the reason this goal was missed. Since the pandemic began, more than 2 billion people have viewed authoritative information about COVID-19 and vaccines on Facebook”.

Wall Street and Technical Outlook

Wall Street consensus hasn’t reacted to recent political events, maintaining a ‘Buy’ rating based upon 40 ‘Buy’, 3 ‘Overweight’, 8 ‘Hold’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $275 to a Street-high $460 while the stock is set to open Monday’s session more than $55 below the median $395 target. This humble placement suggests the pullback will offer a low risk buying opportunity in coming weeks.

Facebook broke out above the August 2020 high at 304.67 in April, entering a strong trend advance that stalled above 355 in June. Two breakout attempts since that time have failed, giving way to a decline that’s now testing short-term support near 337. The selloff could stretch into the 50-day moving average at 334 while the risk of even lower prices will remain high through next week’s Q2 earnings report, which has the power to trigger a larger-scale decline.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Pfizer Lifts to 19-Month High After Blockbuster Vaccine News

Pfizer Inc. (PFE) rallied more than 15% at the open of Monday’s U.S. session after reporting a 90% success rate with a vaccine candidate under development in collaboration with Germany’s BioNTech SE (BNTX). COVID-19 beneficiaries sold off on the news while shares of cruise ship operators, movie theaters, and airline carriers took off for the heavens. However, sellers pounced on the opening bid, dropping the pharmaceutical giant more than three points off the high.

Pandemic Headwinds Likely To Persist

The high efficacy rate is good news but major obstacles are likely to delay an early end to the pandemic. For starters, an October survey indicated that just 58% of Americans will take a vaccine as soon as it’s manufactured, due to anti-vax theories and general political unrest. The 10% ineffective rate is also too high for instant relief, asking those most vulnerable to serious illnesses to ‘roll the dice’, hoping for an immune response.

Pfizer CEO Albert Bouria appeared on CNBC on Monday morning, expressing genuine enthusiasm for the compound. He believes we’re finally seeing the light at the end of the COVID-19 tunnel but warned that side effects have been reported. He also views the candidate as the ‘most significant medical advance in the past 100 years’, which seems like hyperbole, given statins, the polio vaccine, and other life-saving drugs introduced in the last century.

Wall Street And Technical Outlook

Wall Street has been caught ‘asleep at the wheel’ on Pfizer’s long-term outlook, posting a sluggish ‘Moderate Buy’ rating based upon 4 ‘Buy’ and 4 ‘Hold’ recommendations.  To their credit, no analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $38 to a Street-high $53 while the stock has descended to the low target after an opening spike to $42.

Pfizer is a slow moving stock that’s underperformed since a 9-year uptrend topped out less than four points below 1999’s all-time high in 2018. This weak performance induced the keepers of the Dow Industrial Average to remove the stock last summer, in an act of near-perfect timing. It posted a four-year low in March 2000 and turned higher, stalling in the upper 30s in June. Monday’s breakout is test new support at that level, with mid-term upside limited to the mid-40s.

For a look at all of today’s economic events, check out our economic calendar.


News Corporation Posts 22% Decline in Q4 Revenue as COVID-19 Pandemic Hits Business; Target Price $10

News Corporation, a diversified international media and entertainment company, reported that its revenue slumped 22% in the June quarter as COVID-19-related business closures led to an advertisement sales collapse at its newspapers and websites, sending its shares down about 4% in after-hours trading on Thursday.

America’s largest newspaper by total circulation said its revenues dipped 22% to $1.92 billion in the fiscal fourth quarter ended June 30, down from $2.47 billion a year earlier, primarily driven by the negative impacts related to COVID-19 and the sale of News America Marketing.

News Corporation reported a net loss of $401 million, which includes non-cash impairment charges of $292 million and higher restructuring costs due to COVID-19, worse than a loss of $42 million a year ago.

“We have largely maintained our earnings forecasts which incorporate some benefits of management’s cost-cutting initiatives. Despite this, we do not see a return to pre-COVID-19 earnings level until fiscal 2022,” said Brian Han, senior equity analyst at Morningstar.

“With minimal changes to our forecasts, we retain our USD13.40 per share fair value estimate for News, or AUD 18.60. at the current exchange rate. Shares in the no-moat-rated group have staged a strong recovery from the recent COVID-19-induced lows and are now trading in line with our intrinsic assessment,” Han added.

In the quarter, Dow Jones achieved record average subscriptions of 3.8 million to its consumer products, led by 28% growth in digital-only subscriptions, including 23% growth in digital-only subscriptions at The Wall Street Journal.

“We recommend investors hold REA direct, but owning News Corporation is another way to gain exposure, the 61% stake has CMV of $6.8bn or $11.50 per NWSA share,” said Andrew McLeod, equity analyst at Morgan Stanley.

News Corporation’s shares closed 1.65% higher at $13.51 on Thursday but dipped about 4% in after-hours trading.

Executive comment

“The creation of the Dow Jones segment allows us to make a direct comparison with the New York Times,” Chief Executive Robert Thomson said on a post-earnings call, Reuters reported.

“In what has been a difficult year for many media companies, Dow Jones reported a 13% increase in Segment EBITDA, based on the strength of its Professional Information Business, digital growth and the pre-eminence of The Wall Street Journal. One result of our candid approach on costs was that, despite the COVID-19 impact, our cash position strengthened to $1.5 billion from $1.3 billion as of December 31st. We also saw increased profitability at Foxtel and our campaign to reset sports rights prices was successful.”

News Corporation stock forecast

Morgan Stanley target price is $10 with a high of $20 under a bull scenario and $5 under the worst-case scenario. News had its price target hoisted by research analysts at Loop Capital to $18 from $16. The brokerage presently has a “buy” rating on the stock.

We think it is good to hold for now as 100-day Moving Average and 100-200-day MACD Oscillator signal a mild selling opportunity.

On the other hand, three analysts forecast the average price in 12 months at $14.00 with a high forecast of $18.00 and a low forecast of $10.00. The average price target represents a 3.63% increase from the last price of $13.51. From those three, two analysts rated ‘Buy’, one analyst rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

Analyst comment

“We are fundamentally bearish on the outlook for News Corporation shares. We are bullish on NWSA’s 61%-owned Australian digital media company REA Group (OW), but we recommend investors own REA direct rather than via the conglomerate structure of NWSA. Historically, direct ownership has provided superior returns … and we expect that to continue to be the case,” Morgan Stanley’s McLeod added.

“Outside of the REA investment, we think earnings risks across the rest of the NWSA asset portfolio skew more to the downside for print assets and payTV business Foxtel/FoxSports. If it were to occur, a full break-up of the company could have the potential to close the discount at which the shares have historically traded to intrinsic value.”

Upside and Downside risks

1) Sale of large loss-making or declining print assets at a premium 2) Growth of OTT services more than offsets loss of cable/satellite subs at Foxtel. 3) Break-up or re-structure of the company. 4) REA makes gains ahead of expectations, Morgan Stanley highlighted as upside risks to News Corporation.

1) Accelerated decline in print ads brings downgrades and larger cash redundancy/restructuring costs. 2) A loss of positive earnings momentum at REA. 3) Worse-than-expected Foxtel earnings were major downside risks.

Carnival Stock Sinks After Wedbush Slashes Price Target

Carnival Corporation & Plc (CCL) sank 5.45% Monday after Wedbush cut its price target on the embattled cruise operator’s stock from $29 to $20 while reiterating a ‘Neutral’ rating. However, the revised target still implies a 31% upside from Monday’s $15.28 close.

Despite Carnival announcing last week that several of its AIDA cruises will recommence sailing in August and that it continues to see demand from new bookings next year, analyst James Hardiman sees trouble on the horizon amid increasing COVID-19 cases in the United States.

“While a legitimate target for the restart of the AIDA brand is encouraging, we can’t help but think that we remain a far distance away from operations resuming in the United States given a resurgence in COVID-19 cases as well as halted (in some instances reversed) economic reopenings,” Hardiman said, per MarketWatch.

Through July 13, Carnival stock has a market capitalization of $11.95 billion and trades nearly 70% lower on the year. Although, the shares have fared much better over the past three months, clawing back 30%. Earlier this year, the company suspended its dividend and share buyback programs to improve its liquidity position.

Reducing Fleet Size

Carnival, which operates over 100 vessels across nine brands, said it expects to reduce its fleet by 13 ships, representing nearly 9% of its total capacity. The company sold one of its ships last month and has agreements to offload another five. It also has preliminary sale agreements for three vessels and previously announced transactions for four other ship removals. The move creates a more efficient company to navigate the unchartered waters of the ongoing pandemic.

Wall Street View

Analysts overwhelmingly remain on the sidelines, with the stock receiving 12 ‘Hold’ ratings. This is hardly surprising, given the uncertainty surrounding sailing schedules and passenger demand in 2021 and beyond. The stock also has 7 ‘Buy’ ratings and 4 ‘Sell’ ratings. Street price targets range from as low as $9.93 to as high as $27.

Technical Outlook

Since running into resistance at the 100-day simple moving average (SMA) in early June, Carnival shares have retraced back down to the $14.5 level, where price finds vital support from a horizontal trendline. Providing the stock can hold steady in this area, look for a test of the June 8 high around $25. Alternatively, if a breakdown below $14.5 occurs, anticipate a decline to the next key area of support at $11.50.

CCL Chart

Euro Area’s Fiscal Plans Face Financing Challenges Following Covid-19

Understanding gross financing needs (GFNs) is essential to assessing the sustainability of sovereign borrowing by providing an aggregate figure of the maturing debt volume, primary fiscal deficits and interest payments in a fiscal or calendar year.

In 2020, Scope Ratings expects euro area gross financing needs of around 18% of it’s GDP, assuming an aggregate primary deficit of 6% of the GDP and interest payments of 1.8%. By comparison, in 2019, GFNs amounted to 12% of GDP.

“We expect for 2020 a similar overall size for euro area gross financing needs compared with that in 2009, at the peak of the Global Financial Crisis, but this time the focus around the composition will be different,” says Giulia Branz, an analyst at Scope and co-author of the Euro Area Gross Financing Needs in 2020:
rise mitigated by favourable composition . “Hefty fiscal stimulus is the main driver of the rise in GFNs in 2020 while interest payments and the amount of maturing debt remain lower than in 2009,” she says. “Governments are issuing debt to counter-cyclically address the crisis, rather than to service past borrowing. This may support faster economic recovery and thus strengthen debt sustainability over the medium term.”

The euro area’s total GFNs this year might remain comparable to those during the Global Financial Crisis in 2009 if the economic contraction from the Covid-19 remains close to Scope’s baseline estimate of around 6.5% of the GDP. At the same time, euro area governments have varying degrees of fiscal space, with projected GFNs in 2020 ranging from 8% in the case of Estonia to over 30% of GDP in Italy’s case.

The Italian exception

“Italy is among the few countries facing very similar amounts of amortisations and interest expenditures this year compared to 2009, despite recurrent primary surpluses in the aftermath of the financial crisis and the extraordinary interventions of the ECB,” says Branz.

Italy’s gross financing needs in 2020 nonetheless remain far below those projected for other reserve currency sovereigns such as the United States (38.5% of GDP) or Japan (45.6% of GDP). In addition, the European Central Bank’s enhanced role as a lender of last resort and will support fiscal sustainability despite the one-time surge in fiscal deficits. ECB support is expected to keep interest costs low to mitigate spreads in risk premia across countries and absorb part of the additional gross financing needs resulting from higher primary deficits.

An elevated 2020 euro area deficit but a more homogenous fiscal response

“In absolute terms, we currently estimate the euro area’s fiscal deficit for 2020 at around EUR 890bn. This compares with the ECB’s additional purchase programmes totalling around EUR 1trn, of which we can assume around 70% relate to euro area government securities purchases.”

Scope’s forecast of an aggregate euro area fiscal deficit of around 8% of GDP can be broken down into the pre-shock primary balance, shock-related discretionary spending, the cyclical component including higher unemployment benefits and lower tax revenues, in addition to interest payments. While the projection for the cyclical component deterioration is comparable to that seen in 2009, interest payments are significantly lower this time – thus creating the space for greater stimulus.

“We see greater use of fiscal spending in 2020 and more homogeneous fiscal responses across euro area countries, as the discrepancies in their fiscal balances, are set to be much lower than in 2009,” says Branz. Counter-cyclical and coordinated fiscal policy are what countries have to do to mitigate the impact of the economic shock. Still, this will inevitably translate into an increase in the stock of public debt.

A rise in regional debt, but via growth-enhancing spending rather than higher interest cost

“We project the euro area’s debt-to-GDP ratio will increase to a record high of around 98% in 2020, up from 84% in 2019. However, thanks to prudent fiscal policies over the past ten years, much of the increase in public debt results from higher primary spending rather than from higher interest payments.”

Euro-area governments have several ways to offset the impact of higher GFNs on future economic performance, including:

  1. Lengthening debt maturities to lower annual refinancing needs.
  2. Improving the euro area’s long-term fiscal capacity (such as creating a recovery fund, new forms of emergency lending, region-wide unemployment insurance).
  3. Monetary policy support during times of market volatility.
  4. Common endeavours to raise the euro area’s growth potential.

Download Scope’s full report

Giulia Branz is an Associate Analyst in Public Finance at Scope Ratings GmbH.

Not Possible to Time the Markets? Bill Ackman Seems to be Doing a Good Job

I often see comments in social media that it’s not possible to time the markets and that the best approach is to dollar cost average. When the markets fall sharply, as they have been, these types of views tend to accompany further statements like “nobody could have known this was going to happen”.

But at least one investor seems to have gotten it right. Billionaire investor Bill Ackman recently discussed how he put on a hedge in late February as he worried about the Coronavirus and the impacts it could have on the markets.

Business Insider reported that Ackman made a nearly tenfold gain on his bearish investment and has recently cashed in on his two and a half billion dollar profit. He has since used his profits to buy more stocks.

Ackman was criticized by some when he was interviewed by CNBC on March 18 as his emotional message seemed to suggest impending doom.

But he intended to point out that the virus should be taken seriously, and action needed to be taken. He further explained the need for a lockdown and how the government should support the economy by paying for wages for individuals unable to work because of the virus.

Oddly enough, things have pretty much played out how he suggested since March 18th. The US has introduced a $2 trillion stimulus plan and lockdowns are being enforced in many places around the world.

Those that criticized Ackman did so as they felt he was talking the markets down. Many urged CNBC to stop the broadcast as it was happening in hopes of curbing the decline in equities during the interview.

But Ackman clearly stated in his interview with CNBC that despite the potential risk, he was confident the US would do the right thing, and that he was buying stocks. The S&P 500 bottomed two days after his interview and is up 13.5% from the low at the time of writing.

Between his CNBC interview and another interview with Bloomberg earlier this week, he’s made clear that he has invested his $2.5 billion profits by adding to his existing portfolio. The companies he’s specifically said he added to in these interviews are Starbucks (SBUX), Berkshire Hathaway (BRK.B), Agilent (A), and Hilton Worldwide Holdings (HLT).

It remains to be seen whether the current rally in the markets is a recovery or that a long-term bottom is in place. But from where things stand, Ackman made a correct bearish calls when many thought the markets could go a lot higher. And then, he made a bullish call just as the markets were about to bottom, at the least, over the near-term.

Investment decisions like these make me wonder why some people insist that the markets can’t be timed. Granted, investors make wrong calls all the time, but the precision in Ackman’s call as of late is certainly nothing short of impressive.

Obviously it’s much more difficult for the average investor to see the things the way that professionals do and for the most, the dollar-cost averaging strategy remains the best approach.

But Ackman’s recent investment decisions goes to show that at least a few investors out there can time the markets, and are quite good at it.

Exceptional Circumstances Demand Exceptional Action: Scope on Europe’s Covid-19 Crisis Response

Below is an interview with Giacomo Barisone, managing director in sovereign ratings at Scope Ratings.

Are European governments’ responses to the coronavirus crisis the right ones?

Governments in Europe have realised the gravity of the circumstances and are enacting two types of policies: i) containment measures to respond to and mitigate the public health crisis and ii) policies to reduce the economic impact of the crisis.

Tough containment measures are negative for near-term growth, but assuming that they achieve desired ends of slowing transmission – as they have in parts of the world like China and Taiwan – they support prospects of gradually “flattening the curve” of infection rates: that is, ensuring a slower rate of transmission and thus, lowering the strain on hospital capacity and fatalities.

Assuming the containment measures slow the coronavirus’ transmission in the coming months in the northern hemisphere, a focus by governments on alleviating the impact of the crisis on businesses and households is key.

In this context, action by national governments and the European Commission, including liquidity guarantees and targeted support to groups most likely to suffer from the effects of the pandemic – such as the self-employed and small businesses – are what is needed at this stage.

Banks are unlikely to extend loans to businesses that have now become riskier owing to limited cash flows. Tough containment and economic- and liquidity-support measures could abet a very gradual recovery, hopefully starting in H2 2020. However, risks of continued transmission of the virus and/or a new wave in the fall or winter could still have an impact in H2 2020.

What do you think of the ECB’s announcements so far including the ECB’s new emergency package?

The ECB delivered last week a well-designed package of emergency measures to counter the shock, including attractively priced liquidity to the banking system and additional asset purchases to ease significant market anxiety.

The new Pandemic Emergency Purchase Programme (PEPP) of EUR 750bn of new purchases of public- and private-sector securities extending to at least the end of 2020 implies cumulative new asset purchases of almost EUR 1trn when combined with the package announced earlier in March.

Importantly, the ECB is giving itself more room for manoeuvre by conducting securities purchases under this programme with greater flexibility with regards to time and across asset classes and jurisdictions, including a waiver that allows for the purchase of Greek securities.

In addition, the ECB Banking Supervision agreed to temporary capital and operational relief for euro area banks, which should mitigate pro-cyclical, unintended consequences.

This ECB decision also allows for consideration of public-sector issuer limit changes and de facto activation of Outright Monetary Transactions without conditionality via facilitation of the front-loading of purchases for certain countries. The action also underscores authorities’ commitments to avoid the Covid-19 economic shock deepening the existing financial crisis, which could, if left unchecked, exacerbate the overall economic dislocation caused by the pandemic.

What is the impact on Europe’s economic outlook?

We expect a strong downward revision to growth in H1 2020.

Prior to the outbreak of the COVID-19 crisis, we expected moderate euro area growth of just above 1% for 2020. Now, depending on the duration of the lockdowns, the economic impact will be severe. On average, in line with a recent ECB update, we assume for now a 1.5 to 2.0pp decline in growth for each month a country is in lockdown, which for the euro area implies deeply negative growth for 2020.

Will the containment, fiscal and monetary policy response be enough?

This is too soon to tell.

The key for overcoming this crisis is to slow the transmission of the virus until ultimately immunisation treatment is available for public use (hopefully by 2021). The earlier containment measures work, the sooner they can be relaxed in gradual phases, bringing businesses and households back towards normality. In this context, the national and European policy responses are now accelerating and in the right direction.

Will countries breach the European fiscal rules?

No. The Stability and Growth Pact allows for deviations from the 3% fiscal deficit rule under exceptional circumstances and the European Commission has indicated leniency in this regard at least for the year 2020.

Therefore, even if countries’ 2020 deficit figures break beyond 3%, which may be the case for Italy (BBB+/Stable), France (AA/Stable) and Spain (A-/Stable) among others, member states would still be compliant with budget rules as these have been suspended under a “general escape clause” for 2020.

Does this crisis put sovereign ratings for countries at risk?

Our focus in the current environment will be on assessing whether temporary and urgent fiscal measures enacted by governments to counter the public health emergency will have implications that persist over the medium-run as well.

At this stage, the prospect of one-off 2020 fiscal deficits closer to or above 3% of GDP in 2020 is not in and of itself a reason to downgrade a sovereign’s credit ratings. The size and potential longevity of the current simultaneous demand and supply shock induced by the crisis warrant a significant fiscal effort to mitigate the economic impact.

The pandemic is an external shock that will ultimately hit most countries of the world, albeit to varying degrees depending on the effectiveness of containment actions, hospital capacity, policy responses as well as economic structures and fiscal resilience.

COVID-19 is exacerbating risks especially for countries already experiencing low growth and/or those with elevated debt ratios, external vulnerabilities and/or financial system fragilities. Countries whose sovereign ratings might be more likely to be affected include China (A+/Negative), Japan (A+/Stable), Italy (BBB+/Stable) and Turkey (BB-/Negative).

Giacomo Barisone is Managing Director in Public Finance at Scope Ratings GmbH.