(Bloomberg) — The most audacious fiscal plan in eurozone history is creating bullish hopes among bankers, traders and asset managers from Zurich to London.
The European Commission’s 750 billion-euro ($825 billion) package of grants and loans is raising the specter of deeper fiscal integration among investors, who are conjuring scenarios few considered even just weeks ago. It’s fueling an optimistic mood in the market and helping riskier assets climb higher.
Borrowing costs for Italy and Spain have started to come down, and the Stoxx Europe 600 Index is poised to beat the S&P 500 for a second week in a row. Spain’s IBEX 35 is up 7.7% since Monday.
The “mother of all triggers” for European financial markets would be a transfer union, one that narrows the gap between richer countries, said Sylvain Goyon, a strategist at Oddo BHF, a Franco-German financial services group.
That would also heal the rifts that threaten the euro, he said, adding that “the cost of capital would converge towards that of the U.S.” He called the bailout a “game-changer” and recommended investors short U.S. equities in favor of European stocks.
A Radical Plan, and $2.6 Trillion, Brings Europe Back From Abyss
To be sure, bailout package from the European Commission doesn’t involve full mutualization of debt, and still needs approval from some skeptical nations. Austria, Denmark, the Netherlands and Sweden have signaled their resistance and the package needs approval from the 27 EU governments, whose leaders will meet June 19.
There’s no sign yet that the stimulus package is anything more than a one-off response to an unprecedented crisis. Even so, investors are viewing it with a bullish lens.
“It’s completely new territory for the European Union,” Michael Strobaek, global chief investment officer at Credit Suisse Group AG, said in a Bloomberg TV interview. “And that would make the European Union as an investment much more attractive for global investors.”
That would represent a shift for European markets, which have been unpopular compared with the U.S. For example, European equity funds suffered from outflows more than any other major region this year, losing about $31 billion, according to data from EPFR Global and Bank of America Corp.
Bond Buyers Toast EU Ambition in Moment They Were Waiting for
Gary Kirk, a money manager at TwentyFour Asset Management in London, which oversees 17.8 billion pounds ($22 billion), is sticking with his U.S. bias. “It’s a bit early to get overly excited,” said Kirk, who’s waiting to see how the details are hammered out and whether it will pass muster with more austere governments in north Europe.
And betting on Europe has led to disappointment time and time again. Even before the pandemic, markets have long been weighed down by cyclical companies, banks, automakers and energy producers. The region lacks the FAANG tech darlings that powered gains in the U.S.
“The EU fiscal package is certainly helpful,” said Michael Metcalfe, head of macro strategy at State Street Global Markets. “However, since the current global environment still favors certain sectors, tech in particular, this will hamper a full catch-up with U.S. assets.”
In credit, Mizuho International Plc strategists see gains ahead for bonds of banks and companies, even those with junk ratings. In a recent note, they went long on investment-grade corporate debt, and estimated the yield versus government debt could converge to 120 basis points from about 170 basis points currently.
“With the release now of the European Commission’s plan for covid recovery, we see there being room for further positivity in eurozone risk assets,” according to Peter Chatwell, head of multi-asset strategy at Mizuho.
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