Weekly View - A potential game-changer
The European Commission’s recovery fund proposals unveiled last week might one day be seen as marking the first step towards fiscal union. Compromises and further summits will likely extend beyond the EU Council’s meeting on June 18-20, but this ambitious plan is a potential game-changer for EU integration. In the short term, the proposals are providing momentum to European risk assets and the euro. We are also encouraged by European Central Bank’s (ECB) market intervention, now much more proactive than before. There is a good chance that when the ECB meets this week, it will decide to expand its Pandemic Emergency Purchase Plan (PEPP) by EUR 500bn, to EUR 1,250bn, and extend it to September 2021, with the bank standing ready to do even more. Accordingly, we have moved from an underweight to a neutral stance on euro equities.
Meanwhile, China-US tensions are coming to the forefront again. A move by the US Senate threatens the US listings of 200 Chinese companies. This has been followed by reports that China has ordered a temporary halt to imports of some US farm goods including soybeans. Some momentary relief came when President Trump did not quite deliver the harsh sanctions traders had feared last Friday, and we still think the ‘Phase One’ trade deal will remain more or less intact. But with each side trying to exploit the other’s foibles (witness the Chinese response to riots in US cities), developments will need monitoring—and in the meantime, we remain cautious on emerging-market equities overall.
Nonetheless, as economies generally reopen, the equities rebound is rotating from defensive/growth to cyclical/value sectors, including companies that depend on consumer spending. Yet households are understandably much more interested in saving rather than spending. In addition, funding for emergency furloughing and income support is already being wound down. So will consumer spending bounce back? How sustained the market revival turns out to be depends a lot on that question. With some people making more money unemployed than they did when in gainful employment thanks to government pay-outs, the shape of the consumer recovery will certainly bear watching.