What has happened
Markets rose yet again yesterday as equities looked ahead to the ECB meeting on Thursday and a possible extension of the pandemic quantitative easing programme. These hopes led to European markets having a rare period of outperformance with US and Growth sectors lagging, albeit still enjoying solid gains.
What’s on the menu at the ECB
Two aspects are in play here, both an expansion of the size of the programme from €750bn to €1.5tn; but also, an extension of the minimum net asset purchase period. The latter is important as it governs how long the ECB can reinvest maturing bonds for. Effectively, if the duration of this period is extended the ECB can keep topping up the pandemic programme, providing a more structural support for bond markets over a longer period. The rally in European assets over recent days has started to price in some of this hope so there is room for disappointment from the markets tomorrow if there is no change as hinted by some reports over recent days.
The UK hit a one month high against the dollar yesterday, reacting to reports that trade negotiations may see a thawing of red lines. Whilst there is talk of a willingness for compromise on both sides, the thorny issues of fishing rights and a level playing field remain sticking points. This week’s talks are the last before the high level talks between Boris Johnson and the EC & EU Council Presidents later this month. It appears the odds of a deal have increased but there remain many hurdles to overcome. The UK is conscious that with the possibility of an EU recovery fund circulating it may be economically quite risky to extend the transition period unless there was a commitment that the UK was excluded from the cost of financing this fund. Understandably any exclusion would be politically sensitive, not only for the Frugal Four but also Germany that would need to bear an outsized quantity of the liability.
What does Brooks Macdonald think
An extension of the pandemic programme at tomorrow’s ECB meeting is possible but recent reports have been mixed so our ingoing view is that risk is skewed to the downside. If we do see an expansion of the pandemic quantitative easing programme this will boost European risk assets but also take pressure over the need for an urgent EU recovery fund which is needed to deal with economic, rather than financial, issues.