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3.03.2021 320

Market Scenarios and Risks - March 2021

Published March 3, 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 and inflation concerns.

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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


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Global Research Clips


1.  US Economy: assessing the stimulus package impact on growth and inflation

  • The introduction of a new fiscal package in the $1-1.2t range would likely move the growth outlook above 6% Y in the US, with implications for higher average inflation but not for dynamics, which would be tamed by persisting high labour market slack.
  • While the output gap would close by the end of 2021, the labour market slack would be absorbed more slowly, which would limit core domestic inflationary pressures. The core PCE overshoot would only be temporary.
  • A bigger $1.9t package would bring upside risks to real growth and would lift the Core PCE more steadily in line with the Fed target

2.  US Treasury long-term yields have further upside potential

  • The pro-cyclical fiscal policy, with additional fiscal stimulus in sight, and an accommodative monetary policy will support reflation trade, allowing real rates (at the long end) and breakeven inflation rates to move higher.
  • The latest CBO projections released in September 2020 foresee a deficit of around 8% of GDP for 2021. When adding the $900bn agreed package and a potential additional $1tn, the 2021 deficit could go up to 17%.
  • US 2s10s and 5s30s are expected to steepen further, driven by the real curve and higher debt issuance.
  • Amundi UST 10y range for 2021 is 1,5 to 1,8%.
  • Long-end breakevens have more upside potential in the medium term due to the size and speed of the economic recovery and the Fed’s move to a Flexible Average Inflation Targeting (FAIT).
  • We remain confident the long end will move higher. As such we don’t rule out the possibility of the Fed implementing a YCC.

3. Risk assets expected to remain positive on a 12-month fwd basis

  • We expect single-digit returns given our assumptions on the economic cycle and valuations.
  • The current recovery phase of the economic cycle is pro-risk although with fatter tail risks than in the past due to uncertainties related to the pandemic.
  • Valuations are higher as in previous recovery cycles due to central banks’ ongoing monetary policy support, which leaves less room for rerating.
  • Based on macro financial cycle projections (Advanced Investment Phazer) and top down valuation (fair value models), we expect single digit upside for most risky assets.

4. Super Mario in the driving seat to relaunch Italian economic growth

  • Mario Draghi’s appointment and the technocrats assigned to the strategic roles (ministry of digital economy, infrastructure, environment...) have been welcome by the market. This will secure the NGEU implementation process.
  • BTP-Bund spread at the lowest, which renews equity investors appetite.
  • Key challenges: having the “all in “ government at play and maintaining cohesion across a multi-facets government.
  • Italy will lead the next G20. Draghi will play a big global role in leading the meeting: multilateralism, environment and inequalities will be top priorities in the agenda.

 

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

The outbreak continues to expand across the globe with at least three active variants, more than 110m confirmed cases and 2.5m deaths according to the WHO. The Americas have overtaken Europe in number of cases and the US death toll has passed 500k. However, the trend has been reversing for several weeks, giving some hope to the Biden administration, despite the risks of another wave.
The vaccine roll-out continues. Israel is leading the race with more than half of its population having received at least one dose, follow by the UK (25% according to OWD1). Vaccination programmes are taking place at different speeds across the globe, and Europe is still suffering from production delays and logistics issues.
More than 15 vaccines are now available. Johnson & Johnson should get US FDA approval of its single dose refrigerated (easy logistics) product soon, which could be produced at a pace of 1bn+ doses this year. Studies show that the Pfizer and Moderna vaccines are less effective against the new coronavirus variants although at a level that would give some immune protection. To shed light on the geopolitics of the vaccination, we compiled a sample of the countries that have reserved enough vaccines to cover more than half their population (above 15 years old). DM countries fully rely on North Am. & European providers. More than half of doses delivered in EM countries come from North Am. & European companies, followed by China (32%) and Russia (14%). Globally, North Am. & European firms contribute to 88% of the sample demand while China and Russia combined account for less than 12%2.

Amundi Asset Class View


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