Market movers today
With fiscal uncertainty coming lower after Tuesday’s EU agreement and virus numbers generally under control, Europe, for now, seems less of a problem in investors’ eyes. Instead, focus turns to the US, where Congress struggles to find common ground on a new stimulus package as temporary measures stand to expire and the coronavirus remains a cause of sporadic lockdowns.
Today brings a range of confidence figures out of Europe as well as Swedish unemployment statistics.
Selected market news
Despite Tuesday’s EU budget deal yields have come slightly lower, with inflation on the other hand slightly higher – the latter is also the case for equity markets. The 10y EUR swap is currently trading at just -0.22%, which is a mere 30bp above the deposit facility rate of the ECB (the lowest level since 4 March) and points to a prolonged period with an almost zero probability of rate hikes, assuming investors attach only little likelihood to a cut. The latter seems to be the case, and the recent leg lower in yields has not been driven by expectations of further policy rate cuts building – instead one could argue that more sharing of the fiscal burden among EU member states adds even more pressure on the ECB not to hike rates and thereby keeping funding costs low for the entire bloc as opposed to single countries. This is a situation reflecting the idea described by fiscal dominance.
As noted on these pages yesterday, US congress sources on Tuesday expressed doubts on whether a new stimulus package could be put in place before temporarily higher unemployment benefits (an additional USD600 a week per unemployed) are set to expire by the end of this month. Negotiations on a new stimulus package have begun this week and we expect the next stimulus package to include an extension of the higher benefits but, unfortunately, as of today, it does not seem as though the negotiations will conclude before 31 July. However, we expect a reduction in the level of benefits, which could potentially slow the recovery. We cannot rule out the possibility of no extension and if this materialises, we expect a more significant setback in the recovery. See more here: Research US: Not extending higher unemployment benefits would lead to a significant negative income shock, 22 July.
S&P said Wednesday that the establishment of the EU recovery facility was a “break-through for EU sovereign creditworthiness”, referring to lower funding costs for the lowest rated member states as an important trigger in terms of lowering the risks of potential future downgrades. However, at the same time the rating agency will also take into account longer term structural effects when gauging the growth potential among EU sovereigns. S&P has so far not been the most aggressive agency in terms of downgrades, but other rating agencies will likely reach similar conclusions when assessing funding outlooks during future rating actions. Greece is up for review by Fitch on Friday and it will be interesting to see what role the recent agreement has played in the rating decision.
