Eurobonds or Coronabonds?

Eurobonds or Coronabonds?


After dropping below 1% in February, Italian 10-year government bond yields have steadily been climbing, recently rising above 2%. This indicates that investors are not comfortable with Italy's prospects of remaining solvent as it battles the corona pandemic.


On Thursday, EU leaders will have another video conference summit to discuss emergency coronavirus-fighting measures. They are expected to sign off on the EUR 500 billion rescue package that was agreed on 10 April. The main part of the package was to use the existing European Stability Mechanism (ESM) to provide credit lines to all Member
States, without the usual onerous macroeconomic reform requirements attached to the original ESM. Italian Premier Conte has been giving mixed messages about his willingness
to draw on the ESM credit lines, as he continues to push for the creation of Eurobonds, jointly and severally guaranteed by all EU Member States.


Eurobonds, or Coronabonds as they are now also called, are a non-starter for Germany and other northern states like the Netherlands, with Germany claiming they are anti-
constitutional. In typical EU style, a compromise is likely to be found. One possibility is that the EU itself will raise a large sum on its own account. It could probably issue long-term bonds for EUR 1 trillion at a yield of around 0.5%, servicing the EUR 5billion annual interest charge out of its own (expanded) budget. Such bonds would not be guaranteed by all EU governments. German Chancellor Merkel has already signalled her support for the use of the EU budget for such purposes.




European indices ended sharply lower on Tuesday, with oil market turmoil weighing largely on investor sentiment.
Meanwhile, there were increasing signs of a gradual easing of lockdowns.
In politics, the reported that Germany's Merkel is open to a bigger EU budget to finance recovery and the issuance of joint debt via the European Commission. In macro data, Germany ZEW Economic Sentiment saw a rebound in April, while the UK February Unemployment Rate came in a touch above consensus.
In a busy day on the corporate front, PSA Group posted a 16% slump in first-quarter sales and forecast the European market will shrink by 25% this year. Danone abandoned its 2020 guidance, though Europe and North American first-quarter sales rose. In the Nordics, Tele2 was down after first-quarter numbers, suspended 2020 guidance and withdrew its dividend.
In the UK, Primark owner AB Foods said it would not pay an interim dividend and could not provide earnings guidance because of the uncertainty caused bythe pandemic.


US equities finished lower in Tuesday trading. All sectors were lower, with tech and financials the worst performers.
Treasuries were firmer, with curve flattening. The dollar saw big gains vs sterling, but was little changed vs the euro and yen.
Gold finished down 0.3%. WTI crude for June ended down 43.4% at USD 11.57 per barrel, the worst day on record, though off worst levels.
Reopening headlines continue to be accompanied by concerns about a lack of testing and cohesive strategy. A deal was apparently reached on an interim coronavirus support
package that could total nearly USD 500 billion. Trump is to temporarily suspend immigration to the US, given the coronavirus outbreak and the need to protect jobs.
There was a big pickup in first-quarter earnings activity. Banks continue to announce bigger provisions. Consumer staples continue to highlight stock-up demand, though this has faded to varying degrees in April. More firms continue to pull guidance, given the uncertainty over the magnitude and duration of the outbreak.


Asian equities were mostly weaker on Wednesday, with the Nikkei underperforming.
Singapore is extending its lockdown amid rising infections, while Japan is reportedly weighing whether to extend its state of emergency beyond 6 May. The whereabouts of Kim Jong Un remain a mystery, with North Korean media silent and President
Trump admitting he cannotverifyreports about Kim's health.

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