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A profoundly unprecedented step

Joint EU debt at last?

Observers of the euro zone over the last 20 years cannot fail to have noticed that there are limits to the extent of intergovernmental cooperation. One of the widest and brightest red lines for some, including Germany, has been joint, collective, cross-border debt. That line has now apparently been erased, at least by Germany.

Chancellor Angela Merkel and President Emmanuel Macron made a virtual joint appearance on Monday afternoon to present a proposal which includes a shared €500 billion common recovery fund for the EU. The money would be backed by those countries most able to contribute and distributed – as grants, not loans – to those most in need. The European Commission would leverage its top-drawer AAA credit rating to borrow the money at a lower rate than most individual countries could achieve.

The German chancellor made the point, perhaps for domestic political consumption, that the project would be a “one-off effort” to deal with “the biggest crisis in our history”. She must now secure the support of the other 25 leaders, some of whom have flatly refused to go down the path of collective indebtedness. In a masterpiece of understatement Mr Macron conceded that “there is still work to do” in pursuit of “this profoundly unprecedented step”. Investors were enthusiastic though. They took the euro a cent higher against the US dollar and more than 1% firmer against the safe-haven yen and franc.

 

A shot in the arm

Markets were already in ebullient mood before the big announcement from Europe. They took heart from a story that at least one trial of a Covid-19 vaccine is delivering promising results. There was relief that China’s demand for oil had recovered to pre-pandemic levels and the Federal Reserve chairman provided some support too, to equities if not to the dollar.

The oil story put WTI crude above $30 for the first time since early March. Norway’s krone was the biggest beneficiary and became the day’s top performer. Higher share prices across the board typified a generally risk-on attitude that helped the antipodean dollars. The euro and the pound, together with the Canadian dollar, occupied mid-field. They were just about unchanged, on average and against one another.

The Fed published the testimony that Jerome Powell will give today. In it he reminds the Senate that the bank remains “committed to using our full range of tools to support the economy”. Taken together with what he said on TV on Sunday night, there seems to be minimal chance of rates moving higher before well into next year.

 

Part of the information

The UK data released this morning were rather sad. In the first quarter of the year employment was at a record high of 76.6% with unemployment at 3.9%. Then came the April lockdown, which brought an initial 856k jump in jobless claims.

The UK jobs numbers were better than expected and the picture was flattered by the absence of more than 6 million furloughed staff from the jobless ranks: they are counted as still being employed. Sterling reacted positively to the numbers.

European data this morning cover Euroland construction output and German economic sentiment. North America offers US housing starts and building permits, and Canadian new house prices. Chairman Powell addresses the Senate after lunch.

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