4 June - update from our investment partner

  • 4th June 2020

What has happened

Markets surged yet again yesterday with bond yields also rising as optimism flowed through financial assets. This rise in bond yields helped support the banking sector and led value stocks to have another day of strong performance against growth.

Europe on the rise

The value rally that we saw yesterday and growing expectations of stimulus from the ECB, helped Europe to outperform yet again. The German equity market was a particular standout given the announcement of another round of German fiscal stimulus. The total value of the stimulus was around €130bn which includes a VAT cut and a one-off payment to families of €300 per child. There are also provisions in the plan for the stricken travel and hospitality sectors. The main driver of the broader rally in European equities however were expectations around the upcoming ECB meeting with prices adjusting to expectations of an expanded pandemic stimulus programme. The consensus suggests a doubling in the size of the programme to €1.5tn and an extension to mid-2021. All eyes are therefore on the ECB announcement and subsequent press conference at lunchtime today.

What has happened to oil

After being firmly in the headlines in April, oil has embarked on a quiet but steady rally from the days when the near-term futures contract edged into negative territory. Rumours were circulating yesterday that there was a concern, particularly from Russia and Saudi Arabia, that other OPEC+ members were not sticking to their commitments around production cuts. This could cause some volatility in the oil price if members start formally reneging on their commitments as US shale oil producers restart their production post the bounce in the price of the commodity.

What does Brooks Macdonald think

After the rally of recent days we believe the risks are to the downside coming into the ECB meeting today, this could put the recent outperformance of European equities in jeopardy. The ECB has a reputation for delivering only when the market is baying for support rather than when the rally has already priced it in. We will be looking closely at the comments during the press conference, particularly if the crisis programme is expanded, given the recent German Constitutional Court ruling. It is generally accepted that the pandemic programme would not pass the tests set by the GCC so a sizeable expansion could encourage a legal challenge.

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