Good morning,

We can start with the good news this morning, which is the EU did manage to overcome the hurdles of Hungary and Poland to agree a stimulus package worth €1.8 trillion. The sticking points with Poland and Hungary were dealt with in true EU style, by being kicked down the road: Instead of a rewording of the text on the rule of law, an addendum has been drawn up that says that the laws will only apply to the budget and not to the bailout funds and that once the laws are in place, they can be challenged by any country through the European Court of Justice – and they can be challenged even before the EU tries to enforce them! In a nutshell, they’ve said to Hungary and Poland “we need this money, you need this money, let’s park the argument until you think it matters”.

The unlocking of the stimulus package will now see the European Commission go and tap up the capital markets for almost €400bn worth of debt, which is effectively owned by every member of the EU. This mutualised debt has in the past received very mixed degrees of welcome by individual countries, some who see it as an obvious sensible step and others as a bridge too far and them unnecessarily underwriting other countries’ inability to keep their checks and balances. The market though is probably going to love the idea of it: You’ll likely get an enhanced yield over German government debt, but the Germans and the European Central Bank backstopping the investment! Even if the market doesn’t love it, the ECB will be there to buy it all up anyway.

On the note of ECB purchases: They’ve announced a further €500bn of firepower being added to their pandemic emergency purchase programme and an increase in the duration of the facility through to March 2022. This now means that the central bank has the capacity to buy up around 75% of any new government debt issues next year, leaving the market with relatively little. This is a good thing from the perspective of the countries that are issuing debt, but all the market is getting is an artificially supressed bond yield which then works its way through the bond market, skewing the risk/reward relationship even further and running the risk of a very messy end to all of this.

From an economic standpoint, getting this stimulus deal through means that Europe’s recovery prospects are now back on track. Without it there would have been a very uneven recovery and a lot less ambition across areas that are seen as key to a sustainable long term recovery, such as infrastructure, renewables and other green ambitions. Understandably as a result, the euro has pushed a little higher on the news.

The Euro moving higher is adding to the deflation story that Europe is also seeing and the ECB now don’t have a date in mind as to when inflation might get back to their 2% target – only saying that they hope it will be at 1.4% by 2023. Low inflation means that the value of the debts being racked up remain constant and very real. The Euro appreciating effectively imports disinflation because it makes anything priced in another currency cheaper. The ECB opting not to even try and talk down the Euro gave the market the confidence to carry on buying it and continue to push on higher, with gains so far this year of around 10% (15% if you count where we were in March when it all went horribly wrong for a while)

Of course, markets are a zero sum game and as one moves higher, so another must move lower… enter Sterling. The Pound has suffered not only from the Euro strengthening, but more so from the latest on Brexit, which is that we should be preparing for an “Australia style trading relationship”, which is to say no real relationship at all, because the WTO plays chaperone and commands a high price for doing so. Bojo and UvdL will decide on Sunday whether the talks still have legs or whether to just call it a day, which does pose another risk to the Pound. Our view is that negotiations won’t stop even if they say they will and that this goes down to the wire and possibly beyond – We’ve all seen deadlines come and go in the last few years and even December 31st isn’t set in stone, as much as Boris would like to believe that it is – but in the meantime preparations do need to be stepped up.

The Bank of England released their financial stability report this morning, which makes for slightly comforting reading: They say that the risks of a no deal in the financial services sector have mostly been mitigated, but they do acknowledge that some market volatility could arise. They also say that banks are well prepared to absorb credit losses in excess of £200bn if required (though if they start to see numbers in that region, it would no doubt lead to a lot of difficult conversations in bank boardrooms over their willingness to lend).

Our view is that a covid third wave, plus a no deal Brexit, almost certainly pushes us into negative interest rates. We could see a way around it with a Brexit deal, or without another lockdown and consumer confidence staying up, but the Bank will be glad its done the groundwork for them. The prospect of another lockdown, in London at least, seems to be on the cards, with some saying that the review next week will see the capital moved into tier three.

Back to some brighter news: Airbnb managed to more than double it’s share price on day one of trading yesterday. Their IPO price of $68 per share valued the company at around $40bn, but the close above $144 means they’re already worth more than the world’s largest hotel chain, Marriott! The company has revenues of around $5bn per annum and is yet to make a profit, which understandably left the CEO lost for words when he was told of just how high the stock has traded. This has renewed concerns that the tech space is finding itself in another bubble as companies continue to have massive valuations without any underlying profitability. The debate over that will continue.

The bigger tech news of the week is Facebook facing a lawsuit from more than 40 US states. This will be the biggest anti-trust case in the US since Microsoft and is no doubt going to be a multi-year battle of rulings and appeals. The Guardian has a good breakdown of it.

In other news: Oil is back above $50 for the first time since March. The vaccine news has been dragging the price of a barrel up over the last few weeks and some OPEC+ agreements on production quotas earlier in the week have also provided some support. There’s a great weekend read from Bloomberg on the story of a team of oil traders based in Essex who managed to make more than $650 million when the oil markets went negative back in April! It’s quite fascinating and surely a movie in the making.

That’s it from us.

Have a great weekend.


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