Weekly View - Broken taboos
The expansion of the ECB’s Pandemic Emergency Purchase Programme (PEPP) last week, and its extension by six months, can be seen as a fair response to the risk of financial fragmentation in the euro area as borne out by the widening of sovereign bond spreads on the euro periphery when the pandemic was at its height. The expansion of the ECB’s bond-buying programme, which now totals EUR1.35 trn, seems to be doing the trick in this regard, with Italian spreads over Bunds declining substantially, and ECB initiatives also helping euro credits. Combined with the momentum building up behind the European Commission’s proposals for a recovery fund that includes non-refundable grants as well as loans, the mood is beginning to brighten for the euro area. European leaders may not reach a final agreement on a recovery fund at the European Council meeting in mid-June. But the breaking of taboos about fiscal transfers contained in the Commission proposals plus the robust monetary response to the pandemic are making us more upbeat on euro area assets (currency, credit, equities).
Another taboo was broken in Germany, where a EUR130 bn package of tax cuts, spending and support for business marks the reversal of decades of fiscal conservatism. A further EUR50 bn was earmarked for what can be termed a ‘green Marshall Plan’ as Germany seizes the fallout from the pandemic to overhaul its economy. The general acceleration in the move towards more sustainable, less carbon-centric economies in the wake of the pandemic is now one of our main investment themes.
It is not only in Europe that a general feeling of optimism about economic recovery is growing. There was a 10 million surprise in employment in the US, with the monthly report for May showing a 2.5 million rise in jobs compared to expectations for a decline of 7.5 million, the worst miss in economist forecasts ever! We are still some way from being able to assess the full legacy of the pandemic in the US, yet the brightening mood is plain to see in stocks—including a pronounced rotation in stock market performance that is playing to one of our other investment themes, high-quality cyclical stocks.