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How cheaply can the EU fund its borrowing spree?


How cheaply can the EU fund its borrowing spree?

Since July’s agreement by EU leaders to establish a €750bn coronavirus recovery package funded by borrowing, investors have been preparing for the arrival of Brussels as a major force in bond markets. That shift begins in earnest as soon as this week with the bloc due to sell the first bond under its separate €100bn SURE programme before the end of October. 

The SURE borrowing will fund member states’ efforts to help workers keep their jobs during the pandemic, particularly at a time when a second wave of virus infections is sweeping across the bloc.

Bankers and analysts say the sale will provide an early indication of how cheaply Brussels can fund the huge expansion of its borrowing. The EU has about €50bn of outstanding bonds, but it is expected to sell as much as €200bn of new debt next year alone.

Michael Leister, head of interest rate strategy at Commerzbank, expects the SURE funding to begin with the sale of a new 10-year benchmark, possibly accompanied by a 15- or 20-year bond, mirroring the long-term loans provided by the programme.

EU debt is trading at higher yields than those on German bonds, the eurozone’s safe benchmark asset, and France, but well below riskier debt such as Spain or Italy. Mr Leister points to the EU’s top-notch credit rating with two of the three big rating agencies as a draw for investors.

“Remember, the EU has a higher rating than France, and there’s a shortage of triple-A bonds in the eurozone,” he said. Tommy Stubbington

Can the US housing market maintain its momentum?

The US housing market has been one of the biggest winners from the economic fallout of the coronavirus crisis as record-low interest rates help propel demand for homes. A flurry of data out this week is expected to show continued expansion in activity despite fading fiscal stimulus hopes and delays to Covid-19 vaccines. 

Economists surveyed by Bloomberg expect the National Association of Home Builders to report on Monday that confidence in the sector held steady at an all-time high of 83 in October. A reading above 50 indicates favourable conditions.

The economists also forecast that Department of Commerce data for September, out on Tuesday, will show a month-on-month rise in housing starts and building permits of 2.4 per cent and 3.3 per cent, respectively. Finally, data on Thursday from the National Association of Realtors is predicted to show month-on-month sales of previously-owned homes advanced 3.3 per cent in September.

The national housing market has so far outperformed the broader economy, where recovery has slowed. The housing boom has delivered knock-on benefits to home furnishing stores, DIY retailers and even the automotive sector.

“Home ownership is through the roof and you have a lot of people leaving major cities,” said Jim Tierney at AllianceBernstein. “When you leave a city, you need a car to get around.”

Higher lumber and home prices are expected to limit the growth in activity — but “as long as mortgage rates remain as low as they are, home prices going up is not going to kill this golden goose”, said Joshua Shapiro, chief US economist at MFR. Mamta Badkar

Will China’s GDP growth meet high expectations?

The release of China’s gross domestic product data for the third quarter, out on Monday, is set to show an acceleration in the world’s most striking recovery from the coronavirus pandemic.

Economists surveyed by Bloomberg forecast that the world’s second-biggest economy will record year-on-year growth of 5.5 per cent, after a 3.2 per cent increase in the second quarter. That performance, which beat expectations, represented an early rebound from the impact of the coronavirus after China experienced its first year-on-year contraction in decades in the first quarter.

The high expectations for this week’s number partly reflect progress against Covid-19: infections across the country have been low for months even as other big economies continue to grapple with the pandemic.

The recovery has benefited from a state-supported industrial boom, which has led to surging internal demand for commodities. In September, China also imported more goods in dollar terms than in any month in its history.

China’s exports, meanwhile, have increased in each of the past four months, with strong overseas demand for electronics products and medical equipment.

Retail sales data for September, also out on Monday, will provide an update on consumer spending — a weak spot in the recovery, at a time when many Chinese households have remained cautious. Sales of retail goods returned to year-on-year growth of 0.5 per cent in August, after seven straight months of decline. Thomas Hale



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