Weekly View - Mario is back
Former European Central Bank president Mario Draghi has accepted the mandate (and challenge) to form an Italian “government of national unity”. Markets endorsed this development by pushing Italian treasury (BTP) yields down by nearly 10 basis points. Before becoming prime minister, Draghi will need to win the support of the parties in parliament in order to avoid snap elections.
Italy is set to be the largest recipient of the EU’s covid recovery fund, with EUR 200bn of grants and cheap loans, so Draghi’s plate will be full. We are positive on periphery government bonds. Meanwhile European inflation (HICP) recorded its highest rise ever, due mostly to one-off events, pushing market-based inflation expectations to their highest level since 2018. This is positive for the continuation of the rotation to cyclicals and value in equities, one of our investment themes for 2021.
In covid developments, the number of vaccinations outpaced the number of new cases globally for the first time. So despite a slow start, vaccination is gaining traction. That said, Europe’s vaccination rate continues to lag and that, combined with the likelihood that the US fiscal plan is rolled out sooner than Europe’s recovery fund, has sent the USD temporarily stronger. However, we still see a weaker USD to the end of the year. US non-farm payrolls came in lower than expected on Friday and December’s data were revised down. While US unemployment also fell, so did labour-force participation, meaning more discouraged workers have given up looking for jobs.
Last week India announced an expansionary, growth-focused new budget, which pleasantly surprised markets. This will likely add to India’s recovery momentum, posing some upside potential to our current India GDP 2021 forecast of 10% for 2021. This further reinforces our positive view on emerging markets. For those taking part, we wish you a Happy Chinese New Year and a prosperous year of the Ox!