The Banking Executive Magazine - July 2024 Issue

Eurobonds Global Market The same line of thinking has in- spired EU politicians to issue defence bonds – to finance a major boost of the EU’s defence capabilities. Esto- nia’s Prime Minister Kaja Kallas high- lighted in December 2023 the need for EU defence bonds to fight Rus- sia’s aggression in Ukraine. The Eu- ropean Council President Charles Michel suggested that the EU should consider ‘European defence bonds’ to fund investment in European de- fence and security as part of a new push for deeper military coordina- tion. Speaking at the European Defence Agency annual conference on 30 November 2023, the European Council President said EU member states should pool what could amount to € 600 billion in defence investment over the next 10 years. He also pointed out that European defence bonds would be an attrac- tive asset class, including for retail in- vestors. ROAD AHEAD FOR ARAB INVESTORS AND ISSUERS OF EUROBONDS In light of the above overview of Eu- robonds and Eurobonds global mar- ket, we give the following recommendations for Arab investors and issuers of Eurobonds: Recommendation #1. Beware of political uncertainties following EU elections Political uncertainties are set to con- tinue driving market volatility in Eu- rope amid the surprising outcome of the French election. The split of po- litical powers will cast increasing un- certainties on critical policies, particularly in government finance. Recommendation #2. Choosing the right Eurobond currency The euro currency swings amid po- litical uncertainties. The euro weak- ened significantly against other Group of ten G-10 currencies in early June 2024 when French Presi- dent Emmanuel Macron called for a snap election after the far-right party leader. The single currency fell as much as 2% against the United States US dollar to 1.0664 in the sec- ond half of June 2024. Recent elec- tion result put pressure on the euro again. Recommendation #3. Analysing market sentiment The resilient movement in the euro following EU 2024 elections is key to driving market sentiment. Recommendation #4. Watching inflation Investors are closely monitoring the market reactions to the French elec- tion in Europe. Additionally, both China and the United States US are set to release their Consumer Price Index (CPI) data, providing insights into the inflation trajectory of the world's two largest economies. It is hard to predict the long term impact of EU election on inflation, but it is certain that political turmoil will have a long term impact on inflation and currencies in which Eurobonds are issued. Recommendation #5. Assessing investment risk The European stock markets experi- enced a sharp selloff after the first round of the French election. The risk premium on the French debt, measured by the 10-year govern- ment bond yields, retreated to 3.21% after reaching an eight-month high of 3.37% earlier. Meantime, the hard- est-hit sectors such as banking stocks and green energy shares saw the sharpest rebound. the BANKING EXECUTIVE 14 ISSUE 187 JULY 2024