Weekly View - Case closed?
Further evidence of an increasingly forceful resolve to improve the euro area’s cohesion came last week with the ending in Germany of the legal impediment to the ECB’s pursuit of its bond-buying programme. Chancellor Merkel’s coalition parties joined with the Greens and Liberal Democrats to vote to accept the explanation provided by the ECB for its public sector purchase programme (PSPP) and agree that it meets the Constitutional Court’s demand for a Bundestag review of its “proportionality”. Taken in tandem with the European Commission’s recovery fund proposals, it is quite possible that at the next European Council summit on July 17-18 or later during the German presidency of the Council we will see a new course plotted for the EU that involves greater fiscal and political integration with positive long-term implications for euro assets.
Last week saw a stream of good news on the data front, including employment figures in the US and Europe and business sentiment indicators in China and US. There are certainly some caveats, not least the fact that indicators in the US, for example, do not capture the recent surge of coronavirus cases. Nonetheless, we are encouraged that underlying economic dynamics appear intact, as well as by some positive preliminary results were announced on the coronavirus vaccine front. Together, these factors are ensuring market sentiment remains buoyant, irrespective of so-called market ‘fundamentals’. But fundamentals cannot be completely ignored: the lack of guidance on future earnings and the risk that the current recovery loses momentum means we remain underweight equities for new.
On a darker note, further US sanctions in reaction to the Chinese clampdown on Hong Kong must be a distinct possibility. It will be particularly important to watch the issue of semiconductor sales to China’s tech flagship Huawei. The strong recovery in services data unveiled last week is just one more reason to stay broadly positive on the China story but the persistence of US-China tensions, which could well last beyond the November elections in the US, cannot be ignored either.