ECB – Christmas QE.
ECB officials have been hinting towards continued easing into the December meeting. Our view into the last ECB meeting of the year remains a likely ‘recalibration’ to stimulus as a €500bn increase in PEPP purchases and an expansion of the TLTRO program. It is probably too early for a discussion of a broadening of eligible assets for purchases (e.g. “fallen angels”). As global central banks provide an anchor, rates remained supported despite the rally in risk. A growth rebound may push long-end rates higher in the first two quarters of 2021. Credit is likely to remain supported into next year too.
US Fiscal Stimulus – Moving Forward.
Constructive news emerged last week as house speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer suggested a ~$900bn relief framework as the basis for new negotiations with Senate Majority Leader McConnell. This figure is significantly lower than the previously proposed $2.2-2.4tn but improves the likelihood of an agreement before year-end. We believe a settlement this month would lend important support to the US economy over the dear winter, however, we do still see the case for stimulus in excess of 1trn still alive. With Joe Biden and Janet Yellen in the driver seats, plus a potentially favourable outcome for the Democrats in Georgia’s run-off election, we see an upside to the ~900bn and therefore remain bullish on cyclical assets for Q1 2020.
Brexit – Towards a deal.
UK-EU negotiations have been difficult, but a key turning point has been the Democratic victory in the US, where a Biden administration has clearly been in favour of a deal. We believe a soft agreement is within reach by year-end.
Positioning – Still value in cyclical assets, but time to be more selective.
With the US election over and less uncertainty around the vaccine, markets are pricing in near-goldilocks again. Today nearly $18tr in assets yield negative and major equity and credit indexes are back to pre-Covid highs. As we discuss in our latest Silver Bullet | The New Bond Vigilantes, the general market does not offer a Covid discount anymore. While some areas still offer value, it is time to be more selective. We pick asset classes and issuers where the upside is at least equal to the downside risk. Across asset classes, we favour non-IG credit and convertibles to government debt. Across geographies, we favour Europe and Asia to US assets.
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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