2020 Macroeconomic Overview & Financial markets (Fundación Mapfre's viewpoint)

General Overview

The third quarter of the year was marked by three relevant factors:

(i) the deepening slow down of global activity, with the Eurozone, and Germany , being especially key;

(ii) the shift of the global monetary policy toward change in base rates

(iii) the dynamics of international and domestic policies with clear effects on stability, growth and the confidence of economic agents.

Germany might have entered recession in the third quarter of the year, since the information they are releasing continues to confirm a clear deceleration of activity: industrial production, factory orders, export orders and automobile sales. Italy is at a standstill, and activity indicators are negative as well. This will all unavoidably weight on Eurozone outlooks and on the economic performance of its members, with specific relevance for Spain, given its close commercial ties. With no inflationary pressure, and with clear signs of global deceleration, the majority of the world’s central banks are in the midst of a monetary relaxation phase, be it with visible reductions of the reference rate, or with balance sheet increases or more exotic measures like reducing the reserve ratio (in emerging countries) or increasing negative deposit rates (Economic and Monetary Union of the EU).

In the United States, at its meeting in September, the Federal Reserve lowered interest rates 25 basis points (bps), and another cut is expected before the end of the year, with the justification that the global deceleration and trade tensions are having an impact on activity and employment.

The European Central Bank (ECB) also took action at its meeting in September, lowering deposit facility rates 10 bps and restarting the asset purchase program as of November 1st, without indicating an end date. Regarding the risk balance sheet, with an ever greater proportion of bonds with negative yields globally, the markets are nervous, and interest rate curves suggest that the probabilities of recession

are growing.

The question on investors’ minds now is focused on whether or not the central banks and governments will be able to mitigate the deceleration and avoid a recession with their policies, and if these measures will be enough to avoid adverse scenarios.

The general feeling is that assets (bonds, stocks, real estate) are over-valued after a decade of strong monetary stimuli. In this context, in September, in addition to the Federal Reserve and the ECB, interest rates went down in Brazil (-50 bps, to 5.50 percent), Mexico (- 25 bps to 7.75%), Turkey (-325 bps, to 16.50 percent), Indonesia (-25 bps, to 5.25 percent) and Philippines (-25 bps, to 4.0 percent). China is also applying stimulus measures, lowering the required reserves for banks (-50 bps, to 13.0 percent).

Fuente: Fundación Mapfre 2019 Financial Report January - September