LONDON (Reuters) – EU leaders reported some progress on Monday after three days of haggling over a coronavirus stimulus plan, sending the euro to a four-month high and Italy’s borrowing costs to lows not seen since March.
An attempt to reach a compromise failed on Sunday but discussions have since narrowed.
Within the 750 billion euro recovery fund, 390 billion euros could be considered as non-repayable grants, diplomats said, a compromise between the 350 billion level of the five “frugal” countries which want to limit spending and the 400 billion euros demanded by France and Germany.
Talks resume at 1400 GMT for a final push to reach what the chairman of the summit described as “mission impossible”.
The euro rose as much as 0.3% to as high as $1.1467.
Italy’s 10-year yield fell to its lowest since March 9 at 1.19%, wiping out much of the coronavirus sell-off that drove it as high as 3%.
European stock markets remained on the defensive, opening down about 0.5%, but quickly pared gains and were flat at 0854 GMT.
Here are analysts’ views on the possible outcomes and how investors may respond:
SYLVAIN GOYON, HEAD EQUITY STRATEGY, ODDO BHF, PARIS:
“I would take a rather positive view at this stage: 1) The project isn’t buried. 2) Its philosophy, which is for me the most important aspect with a supranational borrowing capacity, isn’t threatened. 3) If 390 bln euros (in grants) is reached, we will be at 78% of the original proposal, not so bad…
“So if one wished to look at the bright side of things, I would say that the (early morning) downtrend amounts to quite logical profit taking after the recent outperformance of European stocks. One also has to note that volumes are low.”
CHRISTOPHER DEMBIK, HEAD OF MACRO ANALYSIS, SAXO BANK, PARIS:
“The likely reduction of the grants is a very negative signal showing that the new EU instrument will have very limited macro impact when it is triggered.
“There are also still a lot of pending questions regarding governance.
“Finally, I believe that the level of acrimony and frustration reached over the past three days will have deep long-term consequences on the functioning of the EU and will increase the rift between North and South.”
EMMANUEL CAU, HEAD OF EUROPEAN EQUITY STRATEGY, BARCLAYS:
“Despite the obvious disagreements between countries and a reduction in the overall package, the fact that an agreement seems possible and that the main points of the proposed plan are respected is a good thing.”
PETER CHATWELL, HEAD OF MULTI-ASSET STRATEGY, MIZUHO, LONDON:
“I think more important than the size of the package at the moment is the fund being implemented (at all).
“If there are more rigid and unpalatable conditionalities, which relate more to stability and growth pact-type conditions, or conditions which are normally associated with a bailout deal, that would hit the breaks on positivity.”
HAO ZHOU, FX ANALYST, COMMERZBANK:
“It might be enough for European leaders to at least produce a statement during the day, referring to the progress made in the negotiations, in order to prevent a major collapse in the euro exchange rate. And even if they do not, I see at least a continued weakness of the dollar limiting the downside in euros.”
JIM REID, HEAD OF GLOBAL FUNDAMENTAL CREDIT STRATEGY, DEUTSCHE BANK, LONDON:
“It seems much depends on whether Macron believes this to be ambitious enough… It seems we may be on hold until this afternoon though but the fact that we are still going well into a fourth day suggests a desire to get something done.”
RODRIGO CATRIL, FX ANALYST, NATIONAL AUSTRALIA BANK, SYDNEY:
“There’s a growing confidence that the downside risk for the euro is now limited on the basis that we’re headed toward some kind of deal.
“But for the euro upside there is a lot of uncertainty… The big picture is that Europe is making a huge, huge step toward a fiscal union – now the size and extent of this fiscal union and conditionality around it is what we don’t know.”
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