5 June - update from our investment partner

  • 5th June 2020

What has happened

The ECB increased both the size and duration of the Pandemic quantitative easing programme yesterday, but markets initially took a pause for breath.

ECB delivers

The Pandemic Emergency Purchase Programme (PEPP) size was increased by €600bn whilst the net purchase period was extended until June 2021 and the reinvestment period extending to the end of 2022. The reinvestment period controls the window in which the ECB can top up the programme when bonds mature so this programme will now provide a structural support to European debt markets for several years. Whilst this was arguably more than the market was looking for, European indices fell. They are more than making up for that lost ground today however. President Lagarde also commented on the German Constitutional Court ruling saying that she was ‘confident that a good solution will be found’.

More US stimulus on the way

Yesterday we also heard that the US may deliver another $1tn fiscal stimulus package which would only intensify the level of liquidity supporting financial markets at the moment. Due to the timing of Congress’s two-week recess this is very unlikely to come together until the start of July, but the prospect of further fiscal stimulus provides a pillar of support for the economy and the market rally.

Constructive talk over the Phase One deal

US Trade Representative Robert Lighthizer took a constructive tone when discussing the Phase One trade deal between the US and China. He cited the purchase of more than $100m of soybeans by China as evidence that the Chinese were holding up their end of the deal. These comments stand in stark contrast to the recent escalation in words by the White House and helps support the market narrative that electoral politics are supporting the tougher words rather than a desire by the Trump administration to tear up January’s deal. Lighthizer also commented that he did not favour the US pulling out of the WTO, another more conciliatory message.

What does Brooks Macdonald think

The huge rally we have seen in risk assets over the last fortnight deserved a breather and this is what yesterday’s pause amounts to. The ECB largely delivered on what the market wanted and this will help liquidity in financial assets as well as provide some confidence that the ECB is not looking to exit the programme in the near term.

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