Stimulus, etymology and PEPP

One word in the financial discourse which we encounter with alarming regularity these days is “stimulus”. Yesterday we had spoken at length about the Japanese stimulus of USD700 bn and today it is the turn of the US and Eurozone. Checking the etymology of this originally Latin word from medical domain, it refers to something which “goads a lazy organ to action”. The word lazy is interesting here and indicates an element of exercising some choice on the part of the stimulus receiver. In case where the receiver is restricted from action due to some divine ordinance (read bad luck, lightening bolt, virus etc) can the stimulus work in that case too?

In the US, the discussions regarding the new stimulus or pandemic relief package have started making rounds again as Republicans insisted that lawmakers should pass a targeted relief plan, side-stepping the contentious issues for now. This should be a compromise package of around USD 900 bn. The sentiment has yet to be reciprocated by the Democrats. The markets have started to discount the glimmer of possibility that some deal might come before the Christmas holidays start. This means that markets expect to hear something in the next week or so.

The other stimulus talk in town is from the ECB which has a policy meeting tomorrow when the governing council meets and which is followed by the press conference. Analysts are debating that the current PEPP (Pandemic Emergency Purchase Program) package will be increased both in size as well as tenor. The current PEPP amount stands at Euro 1.35 trillion which is expected to increase by a further Euro 500 bn (markets median expectation). One more thing to note for the ECB in their deliberations would be the recent strength of the Euro. This is also something they would like to check even if they don’t state it directly. A high Euro hurts exports and the Euro economy’s principal actor is Germany which is their export powerhouse. Germany’s exports to Eurozone economies is around 60% which doesn’t get impacted by Euro levels but the remaining 40% becomes uncompetitive with a rise in the Euro. So the proclivity to announce a bigger relief package which impacts the Euro on the downside will be high. The higher number can be another shot in the arm for risk on assets and we will see a rise in the EM currencies too. Already South African ZAR, for which the Eurozone is a major trading partner, is seen breaking upwards of 15 against the USD which was a major level technically.  

Domestically Indian bonds have witnessed some selling with no new OMO announcements in sight and the foreign investors also booking some profit before the year end. The 10 year benchmark bond trades at 5.94 currently.

In other important news the Brexit discussions are still on with the UK PM to fly to Brussels to take charge of the discussions. The Pound trades at 1.3378 currently.