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LIVE MARKETS-The noisy debt pile in the background

Tue, 08th Dec 2020 11:34

* European shares down slightly

* Sterling recovers amid caution over Brexit talks

* Asian shares dip, Nasdaq closes at record
Welcome to the home for real-time coverage of markets brought to
you by Reuters reporters. You can share your thoughts with us at
markets.research@thomsonreuters.com

THE NOISY DEBT PILE IN THE BACKGROUND (1133 GMT)

The mountain of extra sovereign euro zone debt borrowed to
limit the damage of the pandemic isn't much of a concern as of
yet.

Given that many countries such as France are actually
enjoying negative rates, why should it?

Well, hundreds of billions here and there do eventually add
up and when that wall of debt closes in, the few voices already
demanding the ECB cancels the debt will no doubt be joined by a
loud populist choir.

Many economists have already jumped in that debate and
warned that a push for debt cancellation could lead very quickly
to a political and financial crisis for the bloc.

Ostrum Asset Management chief economist Philippe Waechter
argues that "cancelling the public debt held by the ECB would
probably be the best way to make the euro zone explode".

Anyhow, another hint that the debt pile is making some noise
in the background can be found in Saxo's "outrageous
predictions", a yearly out-of-the-box exercise which just came
out today.

Among potential game changers for the world economy (fusion
power, blockchain, digital currencies, Fed policy mistakes,
universal basic income), is a scenario where Germany bails out
France, caught in a financial crisis as its banks struggle with
a wave of bankruptcies.

"Given the poor state of public finances and the already
extraordinarily high level of debt, France has no other choice
but to come begging cap in hand to Germany, in order to allow
the ECB to print enough euros to enable a massive bailout of its
banking system, to prevent a systemic collapse", Saxo analysts
write in this 'economic-fiction' piece.

Just to be clear, the solvency of the main French banks is
absolutely not being put into question for the time being.

"With solid financial positions, they are well placed to
face the inevitable rise of problem loans over the next few
quarters", is rating agency Scope's post-Q3 assessment of
France's four largest banks.

But what one should probably take away from Saxo's
"outrageous predictions" for 2021 - apart from them being
obviously outrageous - is the idea that eventually, something
will have to give after rounds and rounds of massive monetary
and fiscal stimulus.

"Our not-so-outrageous prediction is that 2021 will bring
the beginning of a reality check to the idea that 'extend and
pretend' can stretch to infinity and beyond, even as markets
have been pricing in that very expectation", writes Chief
Investment Officer Steen Jakobsen.

Some reading:

LIVE MARKETS-European sovereign debt crisis 2.0

Debate around ECB cancelling govt debt is pointless - Italy
finmin

(Julien Ponthus)

*****

BUY UK PLC: LAST CHANCE SALOON TO JUMP IN? (1015 GMT)

UK stocks are so cheap and their dividend yield is so
attractive that they're progressively gaining some popularity
across sellside and buyside circles as Brexit talks enter their
final stages.

But still British stocks remain out of favour so the
question now is will clarity on a trade deal with the European
Union provide the catalyst they desperately need?

Columbia Threadneedle believes so, regardless of the
positive or negative outcome of the talks, and says the window
of opportunity to jump in is closing.

"We continue to firmly believe in the UK, but trends often
go on for longer than predicted. This creates the opportunity we
see today, as it amplifies the impact when the switch in
momentum finally occurs," says Richard Colwell Head of UK
Equities at the U.S. investment manager.

"The window on this potential value to be unlocked is
closing though. Brexit will be determined one way or the other.
This will provide certainty at last," he adds.

The Coronvavirus downturn has let to one of the quickest and
sharpest contractions ever in dividend payments across the UK,
but the good news here is that, according to Colwell, "the tide
has turned and 60 companies have already reinstated dividends".

Reinforcing the idea that this time around could offer a
well-timed entry point into UK stocks is Mark Haefele, chief
investment officer at UBS Global Wealth Management.

"We think next week is still in play for a deal if progress
can be made... UK equities are among the opportunities we
highlight for the next leg up," he said.

This chart shows how the yield spread between FTSE 100
dividends versus UK 10-year government bonds remains well above
long term average, despite being dented by the COVID crisis.

(Danilo Masoni)

*****

NO DIRECTION (0836 GMT)

With so many potentially market moving events this week to
keep an eye on, it looks like investors prefer to stay on the
sidelines to see if the recent rally that lifted the STOXX 600
back to February highs deserves more credit.

As a result European equities are off to a directionless
start with the pan-regional STOXX 600 benchmark moving around
parity in early deals, while country and sectoral indexes were
showing small moves in either direction.

Under the flattish surface of the waiting game for a Brexit
deal and stimulus packages in Europe and the U.S., there were
some big stock moves at the open in Europe.

Sensor specialist ams is down 9%. One trader cites
a Digitmes report saying that Android phone makers are expected
to replace the 3D sensors which ams is currently selling into
Samsung smart phones with the technology used by Apple.

Sweden's Beijer Ref is shooting up 7% after
private equity group EQT bought a stake for $1.1
billion to become its largest shareholder.

(Danilo Masoni)

*****

DEADLINES, DEADLINES (0806 GMT)

No post-Brexit deal yet. If indeed negotiators face a
Wednesday deadline, less than 48 hours remain to iron out
differences and avoid a chaotic start to 2021 for nearly $1
trillion worth of trade flows.

Traders seem hopeful that face-to-face meetings between UK
Prime Minister Johnson and EU Commission head van der Leyen can
break the deadlock so sterling has recouped more than half of
Monday's 1.6% slump. However, option markets may better reflect
market nerves and implied volatility gauges are shooting higher.

Here is another deadline. EU officials gave Hungary and
Poland until today to present a compromise proposal or risk
being left out of the EU recovery fund disbursements.

And later in the day, U.S. lawmakers will continue debating
a stimulus package and a bill to avert a government shutdown
from Friday. At least Japan came through on the stimulus front
with a new $708 billion package to speed up a recovery.

But it didn't prevent Japanese stocks shedding 0.3%.
European and U.S. equity futures are flatlining too and the
relentless march of COVID-19 seems to have given some people
second thoughts about selling big tech stocks for oils and
financials; Nasdaq hit a record on Monday while the Dow and S&P
500 slipped.

There are some positive glimmerings on the growth front,
with Japanese household spending rising in October for the first
time in over a year and revised extimates showing the economy
grew more than initially estimated in July-September.

Hopes are Germany's ZEW indicator due at 10 GMT will cheer
too, after Tuesday's robust industrial output figures.

On the corporate front, a U.S. judge has blocked
restrictions on Chinese-owned TikTok. Dealmaking continues, with
private equity group EQT buying out air conditioner wholesaler
Beijer Ref in a $1.1 billion deal.

Finally, an example of the disconnect between hope and the
current grim reality. AirBnB's stock launch may raise $3.09
billion after it upped its price range to $56-$60 a share, from
$44. The bet clearly is that holiday rentals will surge once a
vaccine-related economic recovery takes hold.

Key developments that should provide more direction to
markets on Tuesday:

-UK BRC retail sales

-Germany ZEW

-Brazil central bank meeting

(Danilo Masoni and Sujata Rao)

*****

MORNING CALL: STAYING ON THE SIDELINES (0632 GMT)

European shares are set to open flat as investors refrain
from making big bets, eyeing developments in make-or-break
Brexit talks just ahead of a potentially market moving EU summit
on a stimulus package and an ECB policy meeting later in the
week.

Futures on main regional benchmarks were trading just around
parity, while FTSE futures eased 0.3% as selling on sterling
abated amid hopes a meet face-to-face meeting between UK and EU
leaders this week in Brussels would lead to a post-Brexit trade
deal.

Asian shares were also last moving around flat, following a
mixed performance on Wall Street overnight where a new round of
coronavirus restrictions led investors to seek refuge in mega
cap tech stocks, pushing the Nasdaq to a record high at the
close, while the S&P 500 ended with a slight decline.

(Danilo Masoni)

*****

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