Jonathan Marriott, Chief Investment Officer, and Jeremy Sterngold, Head of Fixed Income
The dinner meeting between Boris Johnson and Ursula Von Der Leyen appeared to have produced little more than another Brexit deadline on Sunday. Tensions are high with the Prime Minister suggesting there was a "strong possibility" of there being no agreement. On the other side, the EU published a contingency plan with a series of mini deals to keep essentials, such as transport, running. This included continued access to UK waters for European Union fishermen until an alternative is agreed, although this part is unlikely to be popular with Conservative party politicians. Nevertheless, they continue to talk and we suspect that they may still be talking on Monday without any conclusion. While there was little progress on Brexit, the European Union and European Central bank did make progress on moves to support the European economy through the pandemic.
The European budget proposal, which included a €750 billion pandemic recovery fund, had been held up by Hungary and Poland. By tweaking the terms of the deal, the EU was able to overcome the objections and the budget was finally cleared ahead of this week's summit. It had looked as if the argument would delay the much-needed recovery package, so this is welcome news. The ECB has enhanced its support measures. Jeremy Sterngold, our Fixed Income specialist, commented:
"ECB was widely expected to loosen policy as they had indicated that they would. There was a clear need to intervene as inflation pressures in the Eurozone remained much more muted than in other developed markets. The November inflation data showed headline deflation to the tune of -0.3% Year over Year. Core pressures were not much stronger at 0.2%. For a central bank that targets only inflation, this was a clear warning signal that they had to intervene.
While the ECB kept interest rates unchanged, they loosened policy by increasing asset purchases and cheap loans. The Pandemic Emergence Purchase Program (PEPP), was increased for the second time, this time from €1.35 trillion to €1.85 trillion. This was broadly as expected. On the positive side, they announced that purchases will continue at least until March 2022. However, they did announce that additional PEPP purchases "need not be used in full". This was a rather surprising announcement; whilst this gives the ECB flexibility to intervene more aggressively during market stress, it might also signal that even though reducing financial cost between Eurozone nations is a priority, there is a limit of how much they intervene to that effect.
While the action by the central bank is welcome, it was expected and it was, perhaps, a case of 'buy the rumour but sell the fact'. After the announcement, Eurozone government bond yields moved higher, with sovereign spreads moderately wider. Earlier this week, Portugal saw its ten-year bond move into negative yield territory for the first time ever. Following the announcement, these bonds now moved into moderately positive yield."
While the EU and ECB appeared to get their act together to support the European economy, it is harder to see progress on Brexit. Several deadlines have passed and we may yet be talking about trade negotiations right up to the year end. If there is no agreement than talks will no doubt continue in the new year.
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