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Market Scenarios and Risks - September 2021

Published September 8, 2021

5 to 10 minutes

5 to 10 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

As of the end of August, nearly 40% of the world population had received at least one dose of vaccine. The US has reached 60% and most European countries are at or above 70%. The pace of vaccinations has accelerated over the summer globally, and 40 million doses are being administered each day. A third, “booster” jab is starting to be given to vulnerable people. Highly populated countries such as China (1 billion doses) and India (500 million doses) have made huge efforts to protect their people against the disease. However, fewer than 2% of people in low-income countries have received at least one dose. Several large countries, such as Russia, where only 25% of the population are fully vaccinated, are struggling to get closer to herd immunity. As the Delta variant continues to spread across the globe, new mobility restrictions and lockdowns have been implemented in several countries. Vaccines have been proven effective to protect against serious illness but do not block virus transmission. Israel, for instance, has seen a surge of new cases despite one of the highest vaccination rates. The pandemic will therefore remain a source of economic and political uncertainty for the near future.


CROSS ASSET DISPATCH: Detecting markets turning points

Monthly update: The trafic light has turned red on fundamentals and valuations



1. US: solid but declining growth momentum

  • Inflation keeps rising, corroborating our convictions of a stagflationary second derivative scenario, under which growth level remains above average but the rate of change decelerates amid a series of CPI hot prints.
  • Fed Chair Powell confirmed with little detail the gradual shift of monetary policy – splitting the rate hike from tapering.
  • A tapering announcement at the Sept 21-22 meeting could be a source of market volatility.
  • We do not expect tapering to be a major game changer, but with the end of the carry supportive period, we should see rates move up going into the Q3.

   US Treasuries: We have revised our yield targets on the downside 

  • We expect the Fed to remain on the dovish side because of these global growth concerns.
  • US treasuries’ long end have endured years of unconventional monetary policy.
  • During the pandemic the Fed balance sheet expanded from $4 trillion to $8 trillion, weighing on the long end of the curve; it will take time for the market to revert.
  • Tapering will be smooth and the rise in long term bond yields will be contained.
  • Rates hikes would have a limited impact on the 10y UST.

 Investment consequences:

  • We now expect the 10y UST yield to reach 1.4 to 1.6% by yearend and 1.6 to 1.8% within 12 months.
  • Keep short UST duration positioning.

2. Eurozone: better than expected economic outcome

  • Growth in the periphery drifted higher, leading to higher growth expectations for the EZ.
  • ECB firepower remains powerful, in accordance with the “lower for longer” theme. The upcoming ECB meeting, Fed tapering, and German elections will be key volatility events.
  • EZ core rates appear rich in both absolute and relative terms vs the periphery and the credit market. A range-bound regime looks likely to persist for Bunds and non-core.

 Investment consequences:

  • Short core - limited upward lift on German Bund with inflation peaking in autumn.
  • Long EZ periphery bonds (Italy)

 3. German elections: the most open political race in a generation

  • Scholz is more popular than other candidates and has revived the SPD’s voting base.
  • Neither the SPD nor the CDU will have enough votes to build a two-party coalition.
  • An SPD+FDP+Green coalition is now a possibility. The Greens & SPD could push for more fiscal spending and more risk burden sharing in Europe.

 Investment consequences:

  • We expect elections to be a key volatility event, but the outcome and the market impact is too early to predict.

 4. China: slowdown in Q3 and then moderate rebound in Q4

  • We now expect a sequential slowdown again in Q3, on renewed lockdowns and previous policy tightening and then a moderate rebound in Q4 (at a pace similar to Q2 this year).
  • The PBoC’s broad policy tapering plus sector-level tightening was the major culprit behind the slowdown. • New social distancing rules since late July and Delta variant-related issues will become more visible in the August consumption data. China’s policy stance will turn more decisively to the dovish side.
  • We expect policy loosening to come from the credit and fiscal sides, while the PBoC sticks to an accommodative liquidity stance without rate cuts.

Investment consequences:

  • Selective exposure to Chinese equities: seeking opportunities on regulation-insulated sectors (e.g., clean energy and bio tech).
  • Positive on Chinese bonds (HY and hard currency). 



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