EU strike rescue deal, DAX breaks out

After 4 days of uneasy talks, EU leaders agreed to a €750bn rescue package for the bloc which includes €390bn in grants. Although short of the €500bn in grants first proposed, it nevertheless marks a significant moment for the EU. The Frugals were brought round (bought off) by increasing their rebates – they can thank Margaret Thatcher for that. The agreement is a classic EU fudge that papers over the schisms but is nonetheless a step forward towards ever closer union, and this time it’s fiscal. 

 

This has been hailed as Europe’s ‘Hamiltonian moment’ as it involves mutual debt issuance. It’s not quite that – we are not talking about mutualisation of countries existing debts. Nevertheless, it sets an important precedent in securing the idea of fiscal coordination, if not union. Italian yields fell to their lowest level in months, with the benchmark 10yr BTP under 1.12%.  

 

The deal ought to be a positive for the euro and we can look for further gains. EURUSD was well supported above 1.140 and moving higher to test near-term resistance at 1.1470 before we can look for the 1.15 target, the March high. A break here would mark an 18-month peak for the cross and could be chased higher with momentum favouring the euro. The next level would be the Jan 2019 highs around 1.1570. However with the deal perhaps not ticking every box in terms of the amount of fiscal aid on offer, the euro may not be released from its range just yet.

 

Sterling is also on the front foot, with GBPUSD rising to 1.27 and achieving its best level in over a month. With the pressure off in terms of the pandemic rescue package and 7-year budget agreed, there may be hope that the EU is in a better position agree to a Brexit deal. The pressure on the dollar left the dollar index testing support around 95.50. 

 

European equities were higher on a cocktail of the EU budget deal and the ongoing daily dose of vaccine news. AstraZeneca and Oxford University’s candidate is showing promise, whilst there are positive signals from several other quarters. The DAX in Frankfurt surged 1.5% to make a fresh post-Covid high at 13,250. London and Paris remain within their Jun-Jul ranges.  

 

The Nasdaq jumped 2.5% as the likes of Amazon, Alphabet, Apple, Microsoft and Facebook all rose. Amazon shares leapt 8% and continued higher in after-hours trade to break $3,200 after two brokers upgraded their price target to $3,800. Despite positive vaccine news, this was not a reopening trade as such. In addition to Amazon, other ‘Covid-proof’ stocks were very strong with Peloton up over 10% and Zoom almost 9%. The S&P 500 rose 0.8% as tech lifted the boats.

 

Retail may be going through its worst recession in memory, but not everyone is losing out. UK grocery sales rose 10% in the four weeks to July 11th, with Tesco sales +12%, Sainsbury’s +10.2% and Morrisons +15.7%. 

 

UK borrowing is surging – £128bn in the second quarter – but rates on gilts are negative out to 7 years, so there is very little worry about repaying it. The political pressure and inclination to raise taxes will increase, however. 

 

Gold rallied through $1824 to make a fresh 9-year high as US real rates continued to edge lower, with 10yr TIPS down to –0.84%, their weakest in seven years. The entire curve keeps going deeper into negative territory with 5yr TIPS at –1.08% and 30yr TIPS have slipping to –0.30%.  

 

Crude oil has made a push back above $41, looking for a breach of the Jun highs at $41.60 to trigger further gains. Reversal could signal bulls’ exhaustion.