Pause For Reset

Risk appetite waned a bit Thursday ahead of the ECB as markets paused to reflect on a rally that briefly pushed big-cap tech in the US beyond its all-time high.

The dollar looked to snap a five-day losing streak and oil slipped as allegations of cheating cloud the outlook for an extension of the OPEC+ production curbs.

The weaker greenback has helped buoy sentiment for the past several sessions, so it’s not surprising to see a bit of a regime flip on Thursday as traders and investors take a step back to assess the path ahead after a furious run that’s pushed global equities to within ~5% of flat for the year, no small feat considering the circumstances.

The focus Thursday will be on the ECB, but it’s worth noting that Germany is pushing ahead with even more stimulus. The notoriously frugal Germans are now poised to spend some €130 billion to boost consumer spending and prod businesses to invest now that the world’s fourth largest economy is back open (and in recession).

The new package from Berlin comes as EU leaders are preparing for what are expected to be months of negotiations around a €750 billion European recovery fund financed by jointly-issued debt.

“We have been positively surprised by the German fiscal response to the crisis”, SocGen’s Kit Juckes said Thursday.

“Since the start of the crisis, the German government had already agreed on fiscal support and stimulus measures amounting to more than 30% of GDP”, ING marveled. “Last night’s package adds another 4% of GDP and makes the German fiscal reaction to the crisis outstanding”. Here’s a breakdown from the bank of the most notable aspects of the latest package:

• VAT will be temporarily cut from 19% to 16%, from 1 July until 31 December
• The lower VAT rate for hospitality will be reduced from 7% to 5% over the same period
• An additional one-off child allowance of 300 euro per child
• A 50bn euro fund to address climate change, innovation and digitization within the German economy. From this 50bn euro amount, a doubling of the financial incentive to buy electric cars from 3,000 euro to 6,000 euro will be financed.
• Social security contributions will be capped at 40%, at least until 2021, to stabilize net income. Additional costs for social security will be covered by the government.
• Tax loss carrybacks and faster depreciation rules for investments are intended to provide more liquidity and investment incentives for companies
• Another liquidity and loan support programme of 25bn euro for small and medium-sized companies for June to August. Eligible will be companies which saw sales dropping by 60% or more year-on-year in April and May.
• At least 10bn euro will be used to help municipalities struggling with lower tax receipts, with public spending on infrastructure and housing.

“The euro has averaged 1.13 over the last 5 years, compared to 1.31 over the previous five, in large part because the ECB has had to do all the work to keep the economy afloat, with little help from fiscal policymakers”, SocGen’s Juckes went on to write, adding that “joined-up fiscal policy would be the best solution, but robust fiscal policy by individual countries is good too. We are getting closer to having both”.

Yes, we are. And that’s pushed the single currency into overbought territory, for whatever that’s worth.

European shares have risen at least 4.5% for three weeks running. Still, you’d be forgiven for doubting the long-term advisability of a substantial overweight in European equities. As much as I’m an optimist when it comes to political sanity prevailing in the end, I’ve never been totally sure that the European project is a viable one. 2015/2016 showed how vulnerable it is to pernicious populist undercurrents, and a real fiscal union still seems like a pipe dream even if the joint-debt project comes to fruition.

Finally, I’d be remiss not to note that US investors may be troubled a bit (not much, but a bit) by Jim Mattis’s statement about Donald Trump.

Between Mattis’s sharply-worded (and that’s putting it nicely) rebuke and Mark Esper’s declaration that the Pentagon does not back the use of active-duty military against US citizens, one is left to ponder the juxtaposition between a restless military establishment and an increasingly assertive executive. Another textbook banana republic setup.