VaccinehopeandEUpandemicreliefdeal

Risk assets across the world are having a good time whether it is stock markets like the Dow Jones, Hang Seng, Nikkei, Nifty etc, or it is the EM currencies like the South African Rand and Indian Rupee. The news that the Oxford vaccine has shown promise and the EU leaders are able to reach a consensus on the relief program are giving support to the hope trade. The increase in number of cases, elusiveness of herd immunity and Sino US tensions can all take a back seat for now.

We will focus on the EU marathon summit today as the leaders debate to decide the contours of the relief package. It is important to see the bickering in its historical context. Two special works which can help us in understanding the context are World Order by Henry Kissinger and The Euro by Nobel laureate Joseph Stiglitz. Kissinger’s work gives you the background starting from the disintegration of the Roman Empire to the “Thirty Year Wars” fought in the 16^th century. The peace treaties signed post the wars led to the formation of many nation states , a precursor to the current modern countries. His book ends on an optimistic note with the Maastricht Treaty of 1993 which formally introduces the world to the EU.

On other hand, Stiglitz’s book focuses on more recent and contrastingly much more nihilistic views on the European idea. He writes that a supra national entity is inherently unstable because there will be always a case for heartburn for someone or the other. The frugal four or five will always be suspicious of the so called irresponsible South. He gives the example of the debt crisis which happened around 10 years back where the austerity pill was prescribed to the “PIGS” nations which were found lacking on the front of fiscal discipline. This time round again the two nations which have been most hardly hit by the pandemic are Italy and Spain, but as this is more of a natural disaster, the rancour is less this time.

As per the latest reports, the EU leaders have struck a deal on the recovery package. The deal involves Euro 390 bn in grants to economically weakened member states and rest in the form of loans, totalling Euro 750 bn. The marathon summit debated on the proportion of the grants, which were initially pegged at Euro 500 bn, as the so called “frugal block” wanted to keep the grant size low and also wanted to tie it to reform processes. The deal brings focus to the common currency which is trading around four month highs. It also gives fillip to the bonds of countries like Italy and Spain which are now witnessing softening in yields.   

On the domestic front, the Rupee has opened firmly and stocks are trading in green in line with the risk on mood. The bond market is trading flat as the benchmark bond opens at 5.80 around its previous close. Slowly the expectation is building that it is possible that the MPC due in the first week of August might not deliver the oversized rate cut which everyone was hoping for.