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Edition 8th June 2020
By Research, Strategy and Analysis, Amundi
The week at a glance
Eurozone: The introduction of strict lockdown measures across the Eurozone had severe impacts on consumption. The latest data on retail sales in the Eurozone showed a contraction of 11.7% MoM in April ( 19.6% YoY).
United States: Filings for unemployment claims reached 1.9 million last week in the US, bringing the weekly total increase below 2 million for the first time since March 14th, while continuing jobless claims stood at 21.5 million.
Emerging Markets: Last Friday, Colombia’s Monetary Policy Committee cut the policy rate by 50bps to 2.75%. This marked the first split decision since March 2018 with 5 board members voting for a 50bps cut while 2 voted for 25bps. Most market analysts expected a 50bps cut.
Equity: Equity markets once again achieved sharp gains this week. Moreover, the gains were broad-based in the US, Europe, Japan and emerging markets. Market participants honed in on the improvement in leading indicators, including PMI and ISM services, in China, the Eurozone, and the US, along with fiscal stimulus in Europe, and new support measures from the ECB.
Fixed Income: The European Central Bank intensified its response to the unprecedented contraction facing the euro area with a bigger-than-anticipated increase to its emergency bond-buying program. Italian bonds rallied, with the spread on 10Y bonds tightening by 20bp. The US 10Y yield rose by 22bp to 0.87% and US 30Y yield rose by 28bp to 1.66% with inflation expectations and real rates rising in the context of rising risky assets.
Billion euros of additional funds added to ECB’s pandemic emergency purchase program (PEPP)
ECB beats expectations The ECB delivered a stronger-than-expected stimulus through quantitative easing (QE) at its last meeting, surprising market expectations with a combination of 1) the size of the increase; 2) extension of the time period of its net QE flows, and 3) the long horizon communicated for its future reinvestments.
On the back of previous ECB communications, market expectations of a possible increase in the size of the PEPP had grown broadly in the past weeks. However, the size of the increase delivered by the ECB was above the consensus and surprised markets on the upside. PEPP firepower has almost doubled, with an additional amount of EUR 600bn, close to the highest expectations for a EUR 750bn increase. The ECB not only increased the size of its PEPP but extended the horizon of its net purchases to at least the end of June 2021. Last, but not least, the central bank made it clear that the effect of its stimulus will continue to persist for quite some time as a long horizon for PEPP reinvestments was indicated, to continue in fact at least until the end of 2022.
Newsflow from the ECB was quite supportive of spread products, both periphery, and corporate bonds. The additional amount to be bought into 2021, the long period for reinvestments is going to make monetary stimulus act more effectively on financial conditions, lower fragmentation, and keep the cost of funding low for both public and private debt. They are also going to make more powerful the combination of fiscal and monetary stimulus, at a time when market sentiment has improved on Europe thanks to the last steps made on the fiscal side.