July 21, 2020 / 8:39 AM / in 19 days

ANALYSTS VIEW 2-'The money matters': EU stimulus deal lowers region's risk premium

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LONDON, July 21 (Reuters) - Stock markets across the European Union opened higher on Tuesday after its leaders agreed on a massive stimulus plan for their coronavirus-throttled economies.

The euro zone blue-chip index was up 1% and Germany’s DAX rose 1.6% to five-month highs.

News of the deal saw the euro rise to a four-month high of $1.1470 before retreating. Italy’s borrowing costs fell to their lowest since early March.

Here are analysts’ views on the impact the deal is likely to have on financial markets:

LEE HARDMAN, CURRENCY ANALYST, MUFG BANK:

“Overall, we continue to view the creation of the EU Recovery Fund as a positive for the euro. The proposals have already helped to lift confidence in euro zone assets and the euro in recent months.

“While the agreement may not provide a fresh catalyst for further upward momentum in the near term, it should continue to provide more solid foundations for the euro to remain at higher levels.”

GOLDMAN SACHS ECONOMISTS:

“Although the agreement cuts back the share of grants significantly and the complexity of the governance structure might delay disbursements down the road, the final volume of grants is close to what we had anticipated and we are encouraged that leaders were able to find agreement earlier than expected.”

“Taken together, we therefore see the agreement as welcome, supporting our view that the Euro area is well placed to recover from the Covid shock.”

STEPHANE EKOLO, STRATEGIST, TFS DERIVATIVES:

“This deal looks to have been agreed at discount: will it be sufficient to allow markets to continue their run forward?

“Probably yes on the short term. The problem remains implementing the scheme.

“Properly done, it could lead to real European solidarity, one single signature for bonds, a strengthening euro versus the dollar.

“Regarding equity markets, it will all depend if the rescue fund will be sufficient and whether a second wave of COVID-19 will strike.”

NEIL WILSON, ANALYST, MARKETS.COM:

“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.

“The deal ought to be a positive for the euro and we can look for further gains.”

SYLVAIN GOYON, HEAD EQUITY STRATEGY, ODDO BHF, PARIS:

“It’s important because it introduces a dose of federalism.

“The European risk premium will go down, which will contribute to lower the cost of capital and, everything else equal, lower the price-to-earning-ratio discount with the U.S.

“That’s excluding the positive effect on economic growth, and therefore on earnings per share. All of this should help flows come back to Europe.”

EMMANUEL CAU, HEAD OF EUROPEAN EQUITY STRATEGY, BARCLAYS:

“The deal was expected so it’s not a great surprise, but it’s a significant step towards a more integrated and united Europe, which should boost the region’s appeal to global investors and facilitate its re-rating.

“The rise of the euro isn’t a major risk at the moment because it illustrates the lower risk premium for the region, but it could weigh on exporters and Germany and favour a rotation towards the periphery and more domestic sectors.”

ESTHER REICHELT, FX ANALYST, COMMERZBANK:

“This provides a good opportunity for profit-taking. For the time being, no further momentum for the euro can be expected from either the fiscal or monetary policy side.

“From now on, it is primarily the recovery of the real economy and the development of infections that will determine how the euro will perform going forward. All in all, however, we believe that EUR-USD around 1.14 is justified. We therefore do not expect a more sustained downward correction.”

HOLGER SCHMIEDING, CHIEF ECONOMIST, BERENBERG BANK:

“For the first time, the European Union will be a major force on sovereign debt markets.

“The money matters. It will support the recovery of the EU/Eurozone economies with a pro-investment, pro-green and pro-growth tilt. But more importantly, it strengthens the cohesion of the region and may help to reduce political risks.” (Reporting by Julien Ponthus, Karin Strohecker in London, Sruthi Shankar in Bengaluru; editing by Andrew Heavens, Larry King)

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