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Market Scenarios and Risks - July 2021


2 July, 2021

5 to 10 minutes
Market Scenarios and Risks - July 2021

2 July, 2021

5 to 10 minutes


Monthly update

On the back of our quarterly updates, we have reviewed the narrative and the probabilities of our central and alternative scenarios. In our central scenario, the policy mix and improving fundamentals support the recovery and markets. Beyond 18 months, we expect US growth to revert to potential amid a higher inflation regime, while stagflationary pressures rise, in particular across Europe. As valuations are stretched and economic momentum is fading, the expected risk-adjusted return of equities is diminishing. We now consider vaccine-resistant virus variants or vaccination-related issues as a risk to the central scenario.



Monthly update

This month, we are raising the probabilities of Economic and (Geo)political risks to 20%. We now consider Covid-19- related risks, including variants and vaccine issues, as part of the economic risks to our central scenario. Risks are clustered to ease the detection of hedging strategies, but they are obviously linked.


CROSS ASSET DISPATCH: Detecting markets turning points



1. DM: Growth and inflation revised up on US and Eurozone

  • Q1 GDP data surprised on the upside and so our forecasts have been revised accordingly.
  • We are projecting 2021 US GDP at 7.4% (from 7.2%), 2022 at 4%, and 2021 Eurozone GDP at 4.4% (from 3.3%); 2022 at 3.6%.
  • We also revised up inflation on stronger than expected monthly readings.
  • For Central Banks we expect:
    • The Fed to start tapering at the beginning of 2022 and the rate lift-off to begin at the end of 2023.
    • The ECB to continue to provide stimulus through 2022 (details to come at the September meeting), either extending the PEPP/current APP or tapering/ending the PEPP while increasing the APP.

Investment consequences:

  • 12M core govies targets updated: US 10Y at 2.10/2.30% (from 1.8/2%) – Germany 10Y at -0.10/+0.10% (from -0.20/0.00%) – UK 10Y at 1.10/1.30% (from 0.90/1.10%).

2. USD: short-term rates keep the greenback under pressure

  • The cost of hedging dollars has been declining due to front end rates remaining flat as a consequence of the FED’s commitment to FAIT (i.e. very dovish stance on the timing of the first lift-off).

Investment consequences:

  • Even with the FED staying dovish, the strong growth outlook in the US sets the bar higher for further downside risks on the currency.
  • We therefore expect USD to strengthen and are projecting EUR/USD at 1.16 in Q1 2022.

3. Commodities super cycle

  • The current shortage in inventories for base metals is not new, as weaker demand due to sluggish growth over the past several years has been halting several new projects.
  • Oil production remains well below pre-Covid levels and is expected to resume once issues related to Iran sanctions are resolved.

Investment consequences:

  • The recent oil shortage should ease by year-end (12M target: $65 on WTI), as should the base metals inventory shortage.

4. China growth and RMB depreciation

  • The economic recovery is expected to continue at a strong pace: GDP at 8.9-9.5% in 2021.
  • The CPI should continue strengthening to 1-2% yoy, while the PPI is likely to peak in May at c.8% yoy.
  • The PBoC’s RRR increase and approval for outbound investments are an attempt to ease RMB appreciation.

Investment consequences:

  • A slight RMB depreciation is ahead as a consequence of the PBoC’s efforts to contain currency strength and due to expectations for a stronger USD.
  • Target: USD/CNY at 6.5/6.6 for Q4 2021/Q2 2022.

Covid-19 situation update
by Pierre BLANCHET, Head of Investment Intelligence

Despite a successful vaccination campaign, the UK recorded 35k new cases of the Delta variant last week (+46% WoW). This has become the most dominant variant, with 90% of new cases. The British PM may have to postpone the final lifting of social restrictions. In Portugal, the situation is deteriorating rapidly, as well, and the number of new cases is rising in Brazil and Russia. The severity of the Delta variant is unclear, but it is estimated to be 60% more transmissible than the “British” variant. Projections show the Delta variant could account for 90% of all Covid-19 cases by the end of August and could potentially trigger another wave in the northern atmosphere after the summer holiday.

At the time of writing nearly a quarter of the world population has received at least one dose of a Covid-19 vaccine but less than 1% in poorer countries. More than 3.0 billion doses have been administered globally. With a daily run rate of more than 40 million doses administered each day, it will take from six to nine months (at least) to be close to herd immunity. We still consider one of the key risks to be that one of one or more of the virus variants would make existing vaccines ineffective and/or that the vaccines could generate unexpected side effects.



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