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Market Scenarios and Risks - October 2021


4 October, 2021

< 5 minutes
Market Scenarios and Risks - October 2021

4 October, 2021

< 5 minutes


Monthly update

We are maintaining the narrative and the probabilities of the scenarios. The central scenario assumes that the policy mix and improving fundamentals will support the recovery and the markets. Beyond 18 months, we expect US growth to revert to potential amidst a higher inflation regime, while stagflationary pressures rise, in particular across Europe. As valuations are stretched and economic momentum is fading, equities’ 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

We make no change to the probabilities of the risks to the central scenario. We consider Covid-19- related risks, as 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 feared, post-summer fourth wave in the Northern hemisphere doesn’t seem to have spread, despite the Delta variant’s high transmission rate. According to the latest WHO data, the weekly number of cases is actually diminishing. Europe and the US have seen a pick-up from late August through September but nothing close to previous waves. The mortality rate is also falling (to a global average of close to 1.6%, according to the WHO). The number of Covid-19 deaths in persons who had received both vaccine doses and had a first positive PCR test at least 14 days after the second vaccination dose, is very low across the regions. Although we cannot exclude the risk of a new, dangerous variant, the main concerns are now the low level of vaccinations in many emerging market countries and the lack of progress in some advanced economies, such as the US, where only 56% of the population is fully vaccinated. Logistics and trade deal issues explain the delay in lower-income countries. Lack of trust in science and the health system explains the slow motion in the US. Consequently, herd immunity is unlikely to be reached soon, and the pandemic will still be with us for several more quarters.

CROSS ASSET DISPATCH: Detecting markets turning points

Monthly update: The traffic light on economic backdrop has turned from green to orange



1.US debt ceiling and the Democrats political agenda

  • The US debt ceiling and Biden’s infrastructure plans are sources of tensions in Congress that are undermining short-term visibility for investors.
  • Progressive Dems want to link the infrastructure bill with social spending, which conservative Dems are opposing.
  • The Dems’ fiscal agenda is a function of their chances of success in the mid-term elections next year. At this stage, the Reps are likely to regain control of the Senate.
  • Therefore the Dems could try to pass as much fiscal reform and infrastructure spending as they can to show their impact ahead of the polls.

2. ECB recalibrating, not tapering

  • ECB expected to keep its stimulus persisting into 2022, in order to support NGEU efforts on the fiscal side and ensure the economy returns to a pre-Covid path.
  • We expect strong monetary support as long as economic fragmentation persists.
  • Inflation forecast remain well below target. Short-term rates to remain anchored to the current lows for longer on the back of ECB forward guidance.
  • The ECB flagged December as the date for decisions on PEPP and TLTROs.
  • We have moved our 10-year German Bund yield target to -0.40/-0.20% (from -0.10/+0.10%).

Investment consequences:

  • Slight short duration on core Euro-area sovereign
  • Slight steepening of the curve.

3.Energy price increases and inflation outlook for the Eurozone

  • The increase in energy costs due to the surge in post-pandemic demand faces a constrained supply. The increasing costs of CO2 emissions for companies, which are already in play for some countries in Europe, should move inflation higher in the quarters to come.
  • The final impact on consumer prices and households energy bills will depend on how governments limit pass-through effects on regulated prices. Currently for the Eurozone we estimate the impact at approx. + 0.3% on the average inflation rate, concentrated more in 2022. Barring further shocks, inflation is still expected to peak in Q4 and move lower into 2022, yet the peak will be higher (significantly above 3%) and pressures slightly more persistent.

4.Equity styles rotation: introducing Momentum and Quality 

  • Lower bond yields and a strong earnings season have allowed US and EMU equities to hit new highs.
  • Below the surface, peaking growth, negative economic surprises, Covid uncertainty, and potentially lower economic support are raising question marks and pushing towards Cyclicals/Defensives and Value/Growth consolidation.
  • Part of the rotation is also due to a maturing cycle in the US.

Investment consequences:

  • In both US and European equities we are introducing Momentum and Quality, the usual winners in stage two of the business cycle and a way to play relative value.
  • After their rebalancing in May, Momentum indices have become cyclical/defensive proxies.

5.Cross Asset China: positive on equity and credit

  • Sentiment appears to be stabilising from regulatory tightening shocks. Credit outlook is being supported by fiscal loosening.
  • Flow-wise, credit impulse (i.e. new credit) is stabilising and bottoming out.
  • Liquidity outlook to improve further: after growth downgrade, we expect one more 50bp universal RRR cut in Q4, and are removing 10bp hikes in early 2022.
  • No rate cut is expected, given that the credit slowdown was driven mainly by supply factors, i.e. regulatory tightening on housing and local government debt sectors.

Investment consequences:

  • Remain positive on equities. Prefer H-shares over A-shares. Add more to HSCEI, less to HSI and MSCI China.
  • Maintain Credit exposure, preference for long duration IG (5-10yr).
  • Neutral on rates.

6.Commodity super cycle update: medium term upside potential 

  • Post-pandemic, prices have caught up with global growth. The still-depressed inventories cycle is thought maybe to perhaps be the driver of a prolonged uptrend in the medium term.

Investment consequences: 

  • Long on commodities in the medium term.



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