1 May - update from our investment partners

  • 1st May 2020

Read the latest global financial market update

What has happened

US equities in April have had their strongest month since 1987, that said the market ended the month yesterday with more of a whimper. A key factor driving this is the ECB meeting, whilst no major stimulus was expected, the decision to reduce financing costs for banks doesn’t help deal with the elephant in the room which is the sovereign cost of coronavirus.

What did the ECB announce

The major change yesterday was that the bank liquidity programme, TLTRO 3 (the definition is as catchy as the acronym: targeted longer-term refinancing operations) is now lending to banks at a rate 0.5% below base rates. This effectively means that banks using the facility will be paid up to 1% to lend from the central bank – quite extraordinary times when banks are paid to borrow. Whilst this was a positive for risk assets, the ECB did not increase the size of its asset purchases for sovereign bonds.

This is a concern for markets as there’s ongoing doubt that we will see a large-scale EU wide Recovery Fund providing non-repayable grants to member states. If we don’t see coordinated fiscal burden sharing across the EU then individual countries will need to pick the baton to drive the economic recovery. This is easier said than done for cash strapped countries such as Italy that will need to expand their budget deficits and finance this with bonds. As there is little appetite from investors to absorb a sizeable quantity of new Italian debt in the current environment, cue the ECB which will need to pick up large quantities of debt in the primary market. We will need to see the ECB’s bond buying programmes increased sizably if it is to have the fire power required to buy all the country level debt needed to enable a rapid recovery from coronavirus.

What does Brooks Macdonald think

Today will be a quieter day for markets with many Asian and European bourses closed for the Labour Day public holiday. Given the huge relative outperformance of the US in April it is worth taking a step back and comparing the US’s gains (MSCI USA up 18.31%) to Europe (MSCI Europe ex UK up 8.73%). A near 10% outperformance may seem stark but given the relatively robust earnings of some of the more software focused names in US Technology as well as the joined up fiscal & monetary response from the United States, it’s clear there is a good justification for Europe being a laggard.

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