Think About This - EUreka August 10, 2020 | Page 3

Think About This
INVESTMENT RESEARCH
There is some conditionality embedded but we think this is weak. This is a further step towards European
Federalisation, potentially opening the way for harmonization of tax regimes and other economic policies.
As Jean Monnet observed, steps towards integration often take place in times of crisis. His maxim
continues to hold.
This move benefits the government bonds and economies of weaker European countries generally. On the
announcement of the fund, the premium Italy pays on its 10-year bonds compared to Germany shrank to
its lowest level since March. Cheap money and grants allows for fiscal spending and should boost investor
confidence as Germany offers some implicit guarantee.
GERMANY VS. ITALY 10-YEAR GOVT. BOND YIELD
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
Aug 19 Sep 19 Oct 19 Nov 19 Dec 19 Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 Jul 20 Aug 20
German 10 Year Bund Yield
Italy 10 Year Bond Yield
ITALY-GERMANY YIELD SPREAD
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
1.8%
1.6%
1.4%
1.2%
1.0%
Aug 19 Sep 19 Oct 19 Nov 19 Dec 19 Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 Jul 20 Aug 20
Italy-Germany Yield Spread
This is an historic change. For years, many voters and Northern European politicians were extremely averse
to the fiscal transfers and debt mutualisation this recovery fund represents. Cheap Southern European
assets, including their equity markets will benefit, if only for the short and medium term. The Euro also
benefits as this bolsters the structure of the shared currency. We lifted our recommendation on the Euro
and European Equities recently. This policy change encourages us further.
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