Global equities powered ahead coming off holidays in the US and the UK, as reopening optimism and the promise of unbridled stimulus continue to embolden market participants and squeeze the remaining short base.
Japanese equities are buoyant after the country declared an end to its state of emergency and European shares may be looking forward to more news around the consummation of a tentative fiscal union involving hundreds of billions in shared debt to help shore up the hardest-hit economies. Bank of France Governor Francois Villeroy suggested Monday that the ECB will expand the pandemic purchase program, describing the €750 billion vehicle as “a masterpiece”. He said the ECB will not permit “unwarranted” spread widening in certain countries. The market widely expects PEPP to be expanded, and for the ECB to purchase at least €1.5 trillion in total assets by year-end.
The Hang Seng rose sharply on Tuesday, even as China’s new national security plan for the city portends an existential crisis even more acute than that witnessed in 2019, when six months of protests crippled the local economy. Demonstrations flared anew over the weekend and are set to continue.
“The gradual opening of the economies and the recovery dynamics, where Japan ended the state of emergency yesterday and the ongoing news flow on potential drugs to battle the coronavirus is supportive for the equity markets”, Danske Bank said Tuesday. “Furthermore, the Chinese government has sought to reassure Hong Kong and the rest of world that Hong Kong’s legal system will remain independent despite the proposal for a new national security law”.
That latter bit is clearly dubious. China’s “reassurances” in this matter have no credibility whatsoever. This week’s solid start for Hong Kong equities notwithstanding, I’m incredulous that local shares can defy another wave of violent protests and a legal crackdown. Speculators have the currency in their crosshairs, despite its carry appeal.
Rabobank notes that an FT article published Friday cites French and German officials as saying the GCC ruling on the legality of the ECB’s asset purchases (technically it applied to the legacy program, not the pandemic-specific vehicle, but some worried it could hamper the ECB’s crisis response) “was a key factor in informing Angela Merkel’s unexpected about turn in siding with France in its call for an EU recovery fund based entirely on grants rather than loans”.
That suggests Merkel may have believed “the GCC’s stances poses a material threat to the ECB being able to continue to step in to bridge the gap left by the region’s politicians”, Rabobank goes on to say.
Villeroy clearly doesn’t see it that way, but the point is that between the ECB’s commitment to keep doing more and now the push towards fiscal burden-sharing, we could be witnessing a watershed moment for Europe.
“The prospect of a fiscal union with transfers to the periphery is assuaging fragmentation fears despite the hurdles ahead with the so-called Frugal Four expressing opposition to planned grants”, Bloomberg’s Laura Cooper wrote Tuesday. “With Italian debt estimated at 155% of GDP and poised to surge on account of pandemic spending, the ultimate combo of fiscal and monetary backstop would be a game changer for the region that has ostensibly flown under the radar of markets”, she went on to say, adding that “the approval would send the euro sharply higher, periphery spreads tumbling and the valuation play in unloved European equities attracting investor attention”.
Meanwhile, the dollar is on the back foot, which is usually good news for risk assets, and certainly helps any nascent reflationary narrative/trade get traction.
SocGen’s Kit Juckes summed it up. “The Hang Seng has recovered, money remains cheap and plentiful [and] bearish thoughts about currencies, equities and corporate bonds are all being punished”.