The euro strengthened to a 4 month high, and European bond spreads narrowed as regional leaders made progress in negotiating a historic stimulus package for economies devastated by the Covid-19 pandemic.
Italy’s ten year bond yield spread over Germany, a key gauge of risk in the region, fell to the lowest level since March. Most European shares declined, led by oil producers and banks. AstraZeneca Plc gained ahead of highly anticipated results from early vaccine studies. Oil extended losses toward $40 a barrel.
In Europe, efforts continued to agree a 750 billion euro ($856 billion) stimulus package, amid differences over how much of the recovery fund should be distributed through grants versus low-interest loans.
The four governments that have been holding up negotiations are ready to agree on a key plank of the deal, two officials said. The Netherlands, Austria, Denmark and Sweden are satisfied with 390 billion euros of the fund being made available as grants with the rest coming as low-interest loans, the officials said, asking not be named discussing private conversations.
“Our base case is a deal is done by the end of the month, but I still think today is possible,” said James McCormick, the global head of desk strategy at NatWest Markets. “The euro’s broad-based rally was a big macro story last week and it clearly reflected a growing optimism around eventual passage of the recovery fund.”
After three weeks of gains for global equities, investors are weighing up the potential for additional policy support as the pandemic continues to impact economies. Company results are in focus too, with a flurry of earnings reports coming this week.
On the coronavirus front, Hong Kong added a record 108 infections, will require civil servants to work from home and plans to mandate wearing of masks in all shared indoor areas. In the U.S., Los Angeles Mayor Eric Garcetti warned that the city is on the brink of another stay-at-home order.
“Our base case remains for the economic recovery to continue, but for the deep V rebound evident in much recent data to give way to a slower bumpier recovery going forward,” said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. “Shares are still vulnerable to a further correction or consolidation, with renewed lockdowns and the U.S. presidential election being the main risks.”