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Weekly View – Merkel under pressure

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Euro-area growth has hit a slow patch. Following promising signs of having turned a corner, economic data released last week revealed that Q4 growth in the euro area reached its slowest pace since the European debt crisis. German growth was flat for Q4, in line with expectations. As far as Germany’s outlook goes, dark clouds have taken the form of an uncertain political environment and China’s recent weakness. We expect German politics to be even more inward-looking following Annegret Kramp-Karrenbauer’s resignation from the CDU leadership. Snap German elections in 2021 are now more likely. Meanwhile, weakened Chinese demand could take a tangible toll, given German exports to China account for close to 3% of German GDP.

European banks have benefitted from a string of events that underline the deepening interlinkage between credit and equity markets. Investors hunting for yield have driven yields on new issues of CoCo bonds– a particularly risky form of debt – from a number of companies down through considerable oversubscription. While we prefer European over US credits, these latest transactions underscore the need for close scrutiny before investing in credit markets. Cleared by a federal judge after two years on hold, the USD 59bn T-Mobile acquisition of Sprint bodes well for M&A activity and we also continue to favour event-driven strategies in this environment.       

The pound sterling strengthened on renewed hopes of significant UK fiscal stimulus following last week’s major shake up at Number 10. We remain positive on UK real estate and companies with domestic UK exposure. Elsewhere, despite a mid-week spike in new coronavirus cases due to a change in criteria on what constitutes a new infection, the virus’s spread appears to be stabilising. The criteria change was made so that a broader set of patients could receive treatment, which is reassuring. Chinese stocks rallied after Beijing announced increased stimulus measures to help offset the virus’s damage to the economy.

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