Dilemmes politiques

Key points

  • From a policy angle a new fiscal push in the US is needed but political calculations are narrowing the options.
  • We look at the “banking channel” in Europe. There may be some policy space left there.
  • The European council meeting on 15 October will be busy, between Brexit and dealing with a last-minute hurdle on the Recovery and Resilience Fund.
  • The UK’s part-time unemployment scheme focuses on labour re-allocation while raising risks of demand shock.

After some U-turns from the US President and although discussions are continuing, no deal has been found on a new fiscal stimulus package. The Fed has been very explicit on the necessity of a timely and comprehensive additional budgetary push to sustain the recovery. It is unlikely though that another layer of monetary support is imminent to offset the lack of response from the federal government and deal with the softer economy. We may need to wait for the political dust to settle in the US – which may not be come on November 3rd already – to get more visibility on the overall policy mix.

We look at options for central banks though. While we are convinced that quantitative easing, in the current configuration, is the “main game in town”, it may not be the only one. For all the ECB’s accommodation, lending rates to businesses and households have not fallen in this crisis. In several countries, bank margins have rebounded, as non-financial agents have shifted their cash towards non-interest rate bearing sight deposits. Now, margins may not have improved enough to compensate for banks’ higher risk taking in a difficult environment. Making the Targeted Longer-Term Refinancing Operations even more generous, thus reducing banks’ average cost of liabilities, would make sense, in our view, reviving the “banking channel”.

The European Council meeting on October 15th is important. We do not necessarily think that an absence of deal with the UK this week would signal the end of the negotiations – we think the pressure on London continues to build, as the rising probability of a Biden victory would leave a no-deal UK quite isolated internationally. The council may well be focused on internal affairs. The Recovery and Resilience Fund is faced with a last-minute hurdle, as the EU’s multiannual financial framework is conditional on the resolution of a conflict on a new system to enforce rule of law principles in member states. We think a compromise will be found, but a delay is possible.

Finally, we look at part-time unemployment schemes across countries and their likely impact on job retention. The UK system is consistent with a swift reallocation of labour away from “doomed” industries, while raising the risk of an adverse demand shock.

AXA Investment Managers UK Limited is authorised and regulated by the Financial Conduct Authority. This press release is as dated. This does not constitute a Financial Promotion as defined by the Financial Conduct Authority and is for information purposes only. No financial decisions should be made on the basis of the information provided.

This communication is intended for professional adviser use only and should not be relied upon by retail clients. Circulation must be restricted accordingly.

Issued by AXA Investment Managers UK Limited which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No: 01431068 Registered Office is 7 Newgate Street, London, EC1A 7NX. A member of the Investment Management Association. Telephone calls may be recorded or monitored for quality.

Information relating to investments may have been based on research and analysis undertaken or procured by AXA Investment Managers UK Limited for its own purposes and may have been made available to other members of the AXA Investment Managers Group who in turn may have acted upon it. This material should not be regarded as an offer, solicitation, invitation or recommendation to subscribe for any AXA investment service or product and is provided to you for information purposes only. The views expressed do not constitute investment advice and do not necessarily represent the views of any company within the AXA Investment Managers Group and may be subject to change without notice. No representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein.

Past performance is not a guide to future performance. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested. Changes in exchange rates will affect the value of investments made overseas. Investments in newer markets and smaller companies offer the possibility of higher returns but may also involve a higher degree of risk.