Weekly View - A sure thing
Signs from last week’s SURE programme to finance partial unemployment schemes are highly encouraging for the EU’s plans for recovery fund issuance which could start, we believe, in mid-2021. Last week’s SURE issue was close to 14 times oversubscribed at a rate lower than that for French government bonds of comparable duration. We believe this sale marks the arrival of a major new sustainable asset that benefits from the highest rating. An increase in ECB bond buying in December (made all the more likely by the challenges presented by the resurgence of covid-19) will further sustain interest in European fixed income.
Examples of consensus in Washington have been all too rare over many years, but the US Department of Justice’s lawsuit against Google for exercising “unlawful monopoly power” seems to have broad political support. The lawsuit may indicate that the tide is turning for Big Tech—yet our base view remains that these companies, which we think will remain highly profitable, are of such strategic importance to the US in its rivalry with China that regulators will be careful how they tread. In Japan, a recent high-profile takeover battle for control of a home improvements company is further evidence that the historical reluctance of companies in that country to engage in forms of hostile takeovers is coming to an end. We are currently neutral on Japanese equities but predict an upsurge in M&A activity in the years ahead that could provide opportunities for foreign investors who could also benefit if, as we think, the yen rises in value.
The final US presidential debate failed to provide anything to change the trajectory of the polls. At this point, our working assumption is a Biden victory. This could unblock the way for even heftier stimulus than is currently being discussed, especially if the Democrats end up in control of Congress, and points to ongoing US dollar weakness. A contested election result will also weigh on the dollar. Markets more generally are torn between anxiety over resurgent covid cases and the prospect of a new stimulus package – hence our prudent stance on equities.