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2.06.2021  

Market Scenarios and Risks - June 2021

Published June 2, 2021

5 to 10 minutes

5 to 10 minutes

CENTRAL & ALTERNATIVE SCENARIOS (12 TO 18 MONTHS HORIZON)


Monthly update

We maintain the narrative and probabilities of our central and alternative scenarios. In our central scenario, equities outperform on the back of abundant liquidity, improving fundamentals and accommodative monetary policy. Vaccine-resistant virus variants, hawkish policy surprises and geopolitical tensions are the main sources of risks. Beyond 18 months, we expect (US) growth to revert to potential amid a higher inflation regime while stagflationary pressures rise across Europe. As risky assets valuations are stretch, we believe there are narrower margins for a policy mistake or adverse events.

TOP RISKS


Monthly update

Risks are clustered to ease the detection of hedging strategies, but they are obviously linked. We have left the narrative and the risk of the central scenario unchanged this month.

CROSS ASSET DISPATCH: Detecting markets turning points


GLOBAL RESEARCH CLIPS


1. US inflation revised higher on a supportive mix of strong demand and robust pipeline price pressures

  • While we confirm our 7.5% GDP growth mid-range projection for 2021, we have revised up the inflation pattern, now expected to hover above 3% till Q4 and then continue along a deceleration trend to end 2022 at 2.4%
  • We expect US inflation to peak in Q2 on major base effects on the anniversary of the collapse of many prices during the first Covid-19 wave in 2020.
  • Near-term inflation is expected to be particularly volatile on a monthly basis, from the interplay of stronger reopening demand on both goods and services, and constrained supply, in some cases exacerbated by production bottlenecks.
  • The key risk to the outlook remains on the upside: a) greater pricing power on the reopening could lead to faster than expected pass-through of high input cost to output prices, which have so far materialised only partially; and b) a persistent rise in long-term consumer inflation expectations, could become more entrenched into the price setting process.

2. Potential DM equity markets consolidation as the economic momentum has reached its peak

  • Several indicators are looking stretched: manufacturing PMI and ISM are at, or close to, historical highs, MSCI World and S&P 500 consensus forward EPS are already above pre-crisis levels, financial conditions are at their lowest percentile since 2007, and equity positioning are back to pre-pandemic levels.
  • The great rotation out of defensives and into cyclicals is marking a pause. Valuations are stretched.
  • We are downgrading Global Equities from overweight to neutral. However, we expect the market consolidation to be short-lived and that it wouldn’t reverse the bull market.

3. LatAm’s cyclical recovery runs into left swinging political pendulum

  • The political pendulum in LatAm has clearly swung left, pushed by both pre-pandemic structural forces and, more recently, by a tough cyclical environment. Declining productivity and rising social demands compounded by the pandemic have caused a painful economic contraction.
  • Public discontent and anti-establishment sentiment was already apparent in 2019.
  • Chile’s constitutional overhaul, now underway, rests in the hands of a fragmented and left-leaning body.
  • In Peru, hard left presidential candidate Castillo is leading in the 2nd round polls with some radical ideas handy.
  • Colombia’s fiscal reform is detached from reality and is causing real economic and financial damage with the country’s credit rating being downgraded to junk.
  • Brazil’s elections scheduled for late next year are giving the authorities more time to get the economy on a firmer footing and a chance to avoid a leftward shift with Lula.

4. Japanese growth downgraded on Q1 GDP miss and slow vaccination

  • GDP came in much weaker than expected, with the slowdown in private consumption contributing more than half to the contraction.
  • The share of population that has been vaccinated remains low (<10%), exposing Japan to a resurgence of infections. The state of emergency was expanded in early May, weighing on mobility.
  • External demand remains as a bright spot, as overseas machinery orders skyrocketed.

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