What has happened
The positivity of Wednesday’s market reversed yesterday with cyclical equities particularly impacted after a strong run the day before.
Employment data rattles sentiment
The main driver of this change in tune was the US initial weekly jobless claims which were higher than the market expected. Whilst the dataset continues to show a week-by-week improvement, with yesterday’s number the 15th consecutive decline in unemployment, the pace of that improvement has slowed. This raises the prospect that the US economy is already slowing as a result of the pickup in US new cases and given the continued climb in data this is unlikely to improve in the near term. With the number of US cases now exceeding the levels seen in March and April, some economic impact was inevitable. The slowdown in economic activity is driven by the actions of authorities to reverse some lockdown easing measures and the impact of viral pervasiveness on consumer behaviour.
EU Recovery Fund returns
Today the EU summit begins where the EU recovery fund remains firmly on the agenda, we remain skeptical as to whether we will see a breakthrough this weekend however. At the start of the week the market was optimistic that the stalemate would be lifted but several European leaders have guided those expectations down given the division that still exists. The most recent compromise proposal contains EU budget rebates for fiscally more conservative nations but there is no sign yet that this has brought the so-called Fiscal Four on board. The main areas for debate are the total size of the package as well as the split between non-repayable grants and repayable loans. The summit takes place today and tomorrow but the hurdle for a deal appears to be high.
What does Brooks Macdonald think
As time goes on the political pressure for a recovery fund gradually recedes. If, however, no fund materialises the cash-strapped nations in the EU will likely underperform their developed world peers who have been supercharged by fiscal stimulus. Even within the Eurozone there is a huge disparity between the national stimulus provided by Germany and that of Italy and Spain. These differences are likely to drive further regional divergence in wealth and build political problems for the future.