Central banks – time to go on holidays.
Last week, the ECB boosted its stimulus package. The PEPP program has been stepped up by EUR500bn and extended by 9 months, and the TLTRO program will now run until mid-2022. This was slightly below the expectations, including the option not to fully use the purchases envelope. The ECB may have to fight a stronger EUR over the coming months. On Wednesday, we will have the last 2020 Fed meeting. Guidance on rates will remain unchanged, but the central bank is likely to give more guidance on the duration of asset purchases. These will be linked to a satisfactory recovery in labour markets and inflation, and therefore will keep running well beyond the pandemic.
EU recovery fund – Headwind from the East fades.
Last week, EU leaders finally agreed the well-anticipated EU recovery package. The package is worth EUR1.8tn and will be backed by common issuance. Objections from Poland and Hungary regarding the mechanism tying payments to rule of law principles were finally dropped after the Commission threatened to trigger a mechanism to effectively exclude Eastern European countries from benefiting from the package. The next focus will be on the implementation, likely to start in 1Q21. In the run-up to the approval, EUR/USD reached 1.21, and it is now close to the five-year high. We think Euro strength may continue into 2021, especially if a new US stimulus gets passed over the next few weeks.
Brexit – The never-ending saga.
Brexit talks have turned more positive over the weekend with both sides agreeing to go the’ extra mile’ and extending talks past Sunday’s deadline to reach an agreement by December 31. Discussions last week had derailed after meetings in Brussel, ahead of last week’s EU summit. With year-end approaching and relatively small bridges (e.g. fishing) preventing a deal, the chances of a no-deal still remain. A hard Brexit would likely entail an “Australian” deal, where trade takes place via WTO terms and some tariffs/restrictions are likely. Recent developments suggest the UK leadership prefers to avoid compromising on a disadvantageous deal and rather focus on regulatory competition. Markets recently turned more hopeful on a last-minute deal, so the pound, exporters, and selected domestic sectors have still downside in a no-deal scenario.
Yield desperation – Record highs.
Yield desperation is back on. Last week, Portugal and Spain 10y yields turned negative for the first time. After the vaccine-induced credit market euphoria, $18tn of debt is now negative-yielding, globally, back to the historical highs experienced pre-Covid. This represents roughly 20% of the global fixed income universe. Main high-yield indexes now yield below 4%, and less than 5% of global bonds yield at least 5%. Global yield curves are at historical flat levels, suggesting some caution and selectivity will be needed in 2021 for fixed income investors.
To read more on our latest views, please see our Silver Bullet | The New Bond Vigilantes or visit our Insights section.
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