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Market Scenarios and Risks - December 2021


6 December, 2021

< 5 minutes
Market Scenarios and Risks - December 2021

6 December, 2021

< 5 minutes


Monthly update

We change the narrative and the probabilities of the scenarios in line with our 2022 Outlook. The central scenario assumes that Covid becomes endemic with multiple waves albeit manageable, fiscal levers remain significant and tied to monetary policy and growth comes back to potential in 2023.



Monthly update

We have amended the risks to take into account our 2022 central scenario, with no change to the probabilities. We consider Covid-19-related risks to be part of the economic risks. Risks are clustered to ease the detection of hedging strategies, but they are obviously linked.

Covid-19 situation update

Pierre BLANCHET, Head of Investment Intelligence

The new variant Omicron, which was discovered in South Africa mid-November, has 50 mutations, which, presumably, makes it more transmissible and potentially more severe. The WHO highlighted an increasing risk of reinfection, as well, compared to other variants. The low vaccination rate in South Africa, where less than 24% of the population is fully vaccinated, or Botswana (20%) partially explains how we got to this point. Since the Delta variant appeared in December 2020 in India and swept quickly to Europe, starting with the UK, and then reached the US, it has become the most prominent version of SARS CoV-2. A similar scenario is likely in the case of Omicron and therefore, the main questions are the effectiveness of vaccines, tests and current treatments.

At the time of this writing, none of these questions have a definite answer and probably will not have one until mid-December. Hence, the volatility in financial markets over the past weeks. mRNA vaccine producers have confirmed they can produce a new vaccine in a few months, but the billions of doses needed to cover the world won’t be ready until the summer. Moreover, protection against the Delta variant is still the first priority. As temporary precautionary measures, travel restrictions are already being implemented, along with new mobility restrictions and social distancing across regions.

CROSS ASSET DISPATCH: Detecting markets turning points

Cross Asset Sentinels Thresholds (CAST) still supportive

The CAST risk perception has failed to show a structural increase. EPS revisions have stopped deteriorating with the better-than-expected Q3 reporting season and credit risk premiums remain low and a function of still-loose financial conditions. Yet the USD is the dimension calling loudly for risk-off, and its spill-over into the residual dimensions needs to be closely monitored.

Methodology: We consider five inputs, which we call “sentinels”: USTW$, Moody’s Baa-Aaa, EPS revisions, Adjusted Earnings Yield Risk and Adjusted Cash Flow Yield Risk. These sentinels are used to reposition our tactical asset allocation. Once sound thresholds are detected, the five variables are aggregated as an indicator that anticipates the market’s stress conditions, with a certain level of conviction. The pentagon visualises the five sentinels where the red line represents the alert threshold. The greater the distance above the red line, the higher the risk perception, and eventually the need to move closer to a defensive asset allocation. 


1. Reassessing DM central banks policies

  • The Federal Reserve has mastered its communication, guiding markets through the start of its tapering process in the smoothest way possible with no significant market volatility.
  • The ECB pushed back the recent pick-up (and anticipation) in the pattern of policy rate hikes, but had to reinforce the message several times to get a meaningful effect on pricing.
  • The Bank of England misguided market participants by not raising rates as expected and not giving clear guidance on the months to come, effectively triggering a material correction not only on the UK curve but on the rest of DM short term yields, as well.
  • December monetary policy decisions will take into account the impact of the new Omicron variant and its consequences on the growth and inflation outlook.

Investment consequences:

  • Markets are reassessing to less aggressive pricing for a lift-off in interest rates and getting closer to Amundi’s view. We now expect two Fed hikes in 2022.
  • Curves could flatten as growth decelerates, but we reiterate the short duration call.

2. Italy: economic backdrop, valuation and technical are all supportive

  • New positive macro surprises with higher-than-expected Q3 GDP (after a very strong Q2), improved rating outlooks (S&P, DBRS), supportive technicals and attractive relative valuations support a renewed wave of optimism towards Italian debt.
  • Italian equities offer a good opportunity as well, thanks to attractive valuations (PE 2022 at 11.5x, vs 14.5 for Europe), historical high consumer and business confidence, and the potential to enjoy good relative EPS growth next year and positive earnings revisions.

Investment consequences:

  • Investment case reinforced for long BTPs and long BTP-Bund spreads and positive view on FTSE/MIB.

3. DM equity markets: still all about momentum and risk appetite

  • A strong earnings season outweighs the fear of margin pressures, thanks to strong demand and some pricing power.
  • The strength of equity markets has managed to overcome a challenging economic backdrop (stagflation, deceleration of the economic momentum and worsening economic surprises) and high valuations, thanks mainly to benign financial conditions and elevated risk appetite.

Investment consequences:

  • Regional allocation driven by profitability and debt rather than valuation: we like Japan and the US over GEMs, Asia Pac ex Japan and Europe.

4. EM macro momentum: Asia mildly picking up versus Latam and CEEMEA

  • While EM macro momentum is still negative, for the first time in a while we see a shift across the regions, favouring Asia vs Latam and CEE/MEA.
  • Overall, softening domestic and mainly external demand will result in lower growth projections.
  • We expect China’s GDP growth to stay close to, but below, 5% over the next two years. EM growth should be above 6% in 2022 and 4.3% in 2023, while inflation should be above 4% on average.

5. Reiterate our positive call on the USD

  • The recent USD strength has been triggered by positive macro data and historically high inflation, leading to expectations of a faster tapering process and rate hikes in 2022.
  • The bearish dollar view – which assumed that too much was priced in and that the Fed is likely to disappoint – has been proven wrong in 2021 and could once again be proven wrong in 2022. We believe the greenback has not deviated from its long-term valuation level.
  • While expected growth/carry are pointing to lower upside, we remain positive on the USD on a 12 month horizon.
  • Our EUR/USD 2Q 2022 target is now 1.10 versus a market consensus of 1.15. Our 12-month target remains 1.14 (consensus at 1.17). 




The uncertainty around the macro forecasts is very high, and it triggers frequent reassessments any time fresh high frequency data are available. Our macroeconomic forecasts at this point include a higher qualitative component, reducing the statistical accuracy and increasing the uncertainty through wider ranges around them.


  • Scenarios

The probabilities reflect the likelihood of financial regimes (central, downside and upside scenario) which are conditioned and defined by our macro-financial forecasts.

  • Risks

The probabilities of risks are the outcome of an internal survey. Risks to monitor are clustered in three categories: Economic, Financial and (Geo)politics. While the three categories are interconnected, they have specific epicentres related to their three drivers. The weights (percentages) are the composition of highest impact scenarios derived by the quarterly survey run on the investment floor.

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