A Triple defining moment – The European way

WHAT’S NEW - “Deal." Charles Michel’s 5.31 a.m. tweet ended 91 hours of negotiations. The EU leaders’ council President managed to align the 27 country heads to a historic, typical EU compromise. 

WHAT’S NEW - “Deal." Charles Michel’s 5.31 a.m. tweet ended 91 hours of negotiations. The EU leaders’ council President managed to align the 27 country heads to a historic, typical EU compromise. First, the - not surprisingly - adjusted EUR 750 billion “Next Generation” recovery fund, planned to support countries most hit by the corona crisis (e.g. 28% of the funds are about to flow to Italy), represents a huge message of solidarity, proving that Europe works. Second, the financing of the bloc by joint bonds that some call euro- or corona-bonds changes the EU's financing landscape and means a big step forward for the European project facilitating future projects, at least in crisis situations. And third, with almost a third of the funds earmarked for fighting climate change, the package, together with the EUR 1,074 billion budget until 2027, means the biggest green stimulus package in history.

OUR TAKE - Yes, it was anything but easy to reach the deal – but it has been reached sooner than expected. The agreed reduction in the grant figure from EUR 500 billion to EUR 390 billion, while increasing low-interest loans to be repaid from 2028 from EUR 250 billion to EUR 360 billion to accommodate the frugal countries, marks a typical EU compromise. We regard the deal as decisive progress, paving the way to the EU’s fiscal union in the years to come. The strong internal cohesion signal looks at least as important as the enormous funds, as it will decrease political doubts about the EU.

WHAT’S NEXT - It was important to have the deal before the summer break, to prepare the rapid distribution of the funds and the EUR 750 billion EU bond issue. The euro, currently trading at 1.14-15 to the dollar, should continue its moderate appreciation path based on the deal. European equity markets should benefit from the additional investments, while peripheral spreads’ latest narrowing trend remains supported. In the end, fortress EU has become more stable with this triple defining moment.

MARKET REVIEW

EUROPE - European equity markets reversed early weakness to close mostly higher after positive news on coronavirus vaccine trials. European Central Bank Vice President de Guindos said the second-quarter drop in GDP could be slightly better than expected. Elsewhere, UK PM Johnson confirmed the suspension of Britain's extradition treaty with Hong Kong over China's security law. Markets remained optimistic yesterday, as EU leaders worked on reaching a compromise agreement on the recovery fund after talks stretched to a fourth day. They finally did early this Tuesday morning. The landmark stimulus package will see the bloc issue EUR 750 billion of joint debt to help Member States mitigate the economic downturn. To bring hawkish northern countries on board, Merkel and Macron agreed to reduce the grants envelope from EUR 500 billion as proposed. Crucially, the final compromise also included cash rebates for these nations from the EU's regular budget, reducing their annual net contributions.

USA - US equities finished mostly higher Monday, following the third straight weekly gain for the Dow and S&P. Consumer discretionary, tech, comm services led, with growth outperforming value after lagging last week. Treasuries were a touch stronger at the long end. The dollar was stronger vs the yen but weaker vs the euro and sterling. Gold finished up 0.4%. WTI crude oil settled up 0.4%. It was another session helped by upbeat coronavirus vaccine headlines. However, trials remain in their early stages. There was not a lot of corporate news yesterday, though some 20% of S&P 500 companies will release earnings this week. The press highlighted US companies ramping up job cuts and downsizing production amid scepticism about a quick recovery.

ASIA - Asian equities are higher Tuesday, following the latest upbeat headlines surrounding the progress of a coronavirus vaccine. There is continued focus on coronavirus outbreaks across Asia. Hong Kong faces the risk of more stringent mitigation measures after a record rise in daily infections. The daily case total in Tokyo moderated on Monday after consecutive days of 200+ infections.

This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document – based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of July 06, 2020, and are subject to change. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down. Copyright © Quintet Private Bank (Europe) S.A. 2020. All rights reserved.