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2.02.2021 44

Market scenarios and risks - February 2021

Published February 2, 2021

5 to 10 minutes

5 to 10 minutes

Central & Alternative Scenarios

Monthly update

This month, we maintain the probabilities and narrative of our central and alternative scenarios. We confirm our constructive medium-term view on the “financial recovery regime”, with more caution in the short-term on financial markets, given the virus-dependent news flow.

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Top Risks

Monthly update

Risks are clustered to ease the detection of hedging strategies, but they are obviously linked. We maintain the overall narrative and change the probabilities of risks in light of the recent developments.

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CROSS ASSET DISPATCH: Detecting markets turning points

How to the read turning point assessment

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1.  We see a tipping point for UST 10Y yield @ 1.30%

  • Notwithstanding the bold Fed purchase program, the UST 10Y yield reached 1.16% (before falling back to 1.0%over the past days). The rise in nominal yields has been driven by break-evens, and the US 30Y breakeven is now above 2%.
  • Yield curves in the US have steepened but remain far from previous cyclical highs.
  • As long as 10Ys reflects reflationary expectations, it could move even higher but will eventually set a cap for equity valuations.
  • Our 2021 target is 1.30% on 10Ys. Medium-term, we expect the Fed to temper yield volatility on the long end to keep financial conditions easy.
  • Based on historical evidence, we calculate the empirical distribution of the equity risk premium on the 10Ys, and we believe the tipping point relative to equity valuation is 1.30%.

2.  The end of USD exceptionalism

  • Despite its sell-off in H220, the USD remains slightly expensive.
  • Most of the plunge can be attributable to the end of USD exceptionalism, as both expected growth and the real rate premium vs the rest of G10 FX have collapsed.
  • Global conditions and the Fed’s “average inflation targeting regime” suggest the USD will remain under pressure, at least in the first half of 2021.
  • With a Democratic clean sweep, US growth expectations climbed, and a partial re-rating into US interest-rate expectations has already materialised. We see it as source of short-term volatility but not enough to trigger a new USD bull run.
  • A strong rerating in US rates is, in our opinion, the only potential game changer.

3. US growth impacted by fiscal stimulus while Europe is revised down

  • Our US GDP growth baseline was 3.7% average 2021 growth with no fiscal stimulus.
  • The $900 billion package is adding +1.8% to our average growth forecast, which is now ranging from 5.2% to 5.7%.
  • In Europe, we are revising downward our 2021 growth range for the Eurozone (now 3 to 3.5%) as well as for the UK (now 3 to 3.5%).

4. EM growth assessment

  • Growth forecast revisions during Q4 2020 have seen a shift in the growth premium towards EMs in 2021 in comparison with previous expectations. Mobility data, broadly decelerating, have been confirming these expectations. 
  • EM mobility data have declined overall, but less so in Asia with the last period corresponding to the Christmas break.
  • China high-frequency data are confirming our view of a sequential slowdown but stronger than originally expected. Our central scenario assumes Chinese GDP to grow by 8.4 to 9% this year.
  • We expect EM GDP to grow from 5.7 to 6.5 % in 2021 and 3.9 to 4.9% in 2022.

5.The big disconnect between real economies and financial markets continues

  • Market participants are looking with only marginal interest at fundamentals, having full confidence in central banks’ keeping the “pedal to the metal” to preserve loose financial conditions.
  • We are not in this camp. We think the reporting season is a relevant sanity check moment. Maybe Q1 reporting season will be more insightful than the current Q4 but we think that fundamentals have to come back in the radar.
  • We expect a growth rebound in H2, but as long-term investors, we must look at its sustainability over time. The equity markets are racing ahead on the expectation of massive public spending and rapid rollout of vaccines, we are more comfortable with a relative value position than embracing outright risk-on.


Covid-19 update: virus mutations and vaccines efficacy
by David Brecht, Fixed Income Analyst, CFA

Several recent studies are showing that the three worrisome coronavirus variants (UK, South Africa, Brazil), have the same mutation in the spike protein, and it appears they evolved this mutation separately. The studies have been small and many use pseudo-viruses instead of live coronaviruses, but they show the current approved vaccines will work effectively against the UK variant. However, it does appear that existing vaccines and convalescent blood serum do not provide as much of an antibody response to the South African and Brazilian variants. The mRNA vaccines (Pfizer and Moderna) promoted a very strong antibody response in trials (higher than seen in patients who had actually recovered from Covid infections). Therefore, these vaccines should still have some level of efficacy with the new variants. Moreover, these trials do not factor in other parts of the human immune system that also play a role in fighting infection (e.g. T-cells). Finally, these vaccines will be updated over time to account for mutations; Moderna is talking about the next version of its vaccine, which could be ready two months after being designed.

As time of writing, we therefore believe it is reasonable to assume that mass vaccinations will curb the pandemic.



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