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Markets scenarios & risks - September 2020

 

SUMMARY

Central & Alternative scenarios

Top Risks

Cross Asset Dispatch

Global Research Clips

Amundi Asset Class Views

Flag-UK

September 2020

Flag-FR

Septembre 2020

 

 

Market scenarios & risk - anchor

Monthly update

We marginally amend the narrative of our central and alternative scenario on the back of recent development. Recent data confirm a slower recovery path in line with our central scenario. We therefore increase the probability of our central scenario from 60% to 70% while reducing the likelihood of the upside alternative scenario from 20% to 10%.

Table 1

 

Covid-19 update: managing summer tourists’ way back

Over the recent weeks, the number of cases in Europe has continued to rise, in particular in those countries that have registered an increase of visitors during the summer break. It is also true, though, that there has been a ramp-up in testing, and we will need to wait mid-September to draw conclusions that are more indicative of the potential for a second wave. In the worst case, we do believe that lockdowns, if any, will be selective, as economies are too fragile to afford extensive shutdowns. In contrast, in the US the number of cases has fallen almost 40% since peaking in July, providing a boost to its equity markets.

On a more long-term perspective: medical treatment is improving, including the use of blood plasma from survivors. Despite the lack of trial data, markets welcomed the US regulators’ approval of plasma transfusion. A much bigger focus is scaling up production of specific antibodies (more than 70 are now under deployment by different companies) that will likely have the potential for both therapy and prevention. These treatments (in the end more expensive than vaccines) will likely be ready for the next summer, while companies are working together to boost production that will have to be massive.

 

TOP RISK

Monthly update

Risks are clustered to ease the detection of hedging strategies, but they are obviously linked. We maintain the overall narrative and probabilities on the risk outlook with the pandemic exacerbating existing fragilities and vulnerabilities.

Table 2

 

CROSS-ASSET-DISPATCH

Table 3

Cross Asset Sentinels Thresholds (CAST) still supportive

Graph table 3

CAST flags extremely low risk perception.

Sentinels remain in pro risk territory due to a general improvement in all the components (except ERP adjusted for credit risk).

Methodology We consider five inputs which we call “Sentinels”: USTW$, Moody’s Baa-Aaa, EPS revisions, Earning Yield risk adjusted and Cash Flow yield risk adjusted. These sentinels are used to reposition our tactical asset allocation. Once sound thresholds are detected, the five variables are aggregated as an indicator that anticipates the market’s stress conditions, with a certain level of conviction. The pentagon visualizes the five sentinels where the red line represents the alert threshold. The greater the distance above the red line, the higher the risk perception, and eventually the need to move closer to a defensive asset allocation.

global research clips

 

1. V shape recovery

We don’t buy the V-shaped view markets are pricing in

  • The fastest part of the recovery is over. A flatter, more gradual track will follow. The economic backdrop remains fragile and is still in the grip of the pandemic.
  • Preliminary Q2 data were broadly in line with our expectations, with no major revisions on the growth front except negative surprises in Spain and Germany. Q3 GDP tracking seems to confirm our expectations of slowing momentum in late July, in line with a gradual recovery. The resurgence of cases is an emerging risk after a post-lockdown rebound in activity.
  • After the Q1 and Q2 declines, the Q3 recovery does not seem enough to bring most economies back to normal. Economic performance will progress along a slow upward sloping catching-up process. A vaccine would avoid temporary damage morphing into long-lasting loss and reinforce the recovery.
  • Policy measures in developed markets have primarily targeted households’ income preservation with the prospect of a V-shaped recovery via different forms of employment benefit. We therefore see a risk in the transition towards 2021, when these benefits will progressively expire. Consumption remained resilient but will be likely be challenged in the event that labour market conditions deteriorate.
  • In our central scenario, this implies GDP pre-Covid levels not being reached before several quarters from now on average, with China being the exception. This translates in our cautious projections on EPS growth that we expect to rebound in 2021 albeit to lower levels than expected by the consensus.

2. Eurozone debt market

Eurozone funding needs are almost covered for the year, lightening the pressure on ECB and allowing some relapse on asset purchase programs

  • The technical picture for Eurozone (EZ) government bond looks friendly to the current environment of low core yields and subsequent search for carry.
  • According to our estimates, the ECB has so far covered for most of YTD net supply, for many countries reaching a proportion of 90% of bonds net issuance. Assuming that most of QE overall potential will be allocated to public debt (80%) through capital key rules, with a proportion of two thirds this year and one third left in H1 next year, the ECB purchases should more than cover for remaining fiscal needs until year end.
  • EZ yields are at lows and spreads tightened not far from pre-Covid levels. As a result, the ECB is gaining flexibility to be potentially used to support private programs and keep sovereign bond purchase capacity for next year as a backstop in case of need or banks’ year-end holding rebalancing.
  • However, EZ banks are incentives to keep govies holdings in the current environment of very attractive ECB funding facilities and negative rates charged on excess reserves, which therefore limit an eventual reduction in exposure.
  • This demand/supply backdrop is likely to support the present environment of low and negative yields in core countries, while, at the same time, supporting carry search through periphery debt.

3. Fragile momentum

Markets dynamic should be more sideways going forward

  • We don’t expect the global economy to get into pre-Covid levels soon, in the labour market (unemployment) in particular, and believe the market is pricing in an unrealistic V-shaped recovery.
  • Valuations are highly distorted by central banks activities, and we consider current stock market levels are pricing in our base scenario fully. Slicing and dicing broad equity indices, we notice a highly polarized market that definitely offers opportunities for stock pickers but constitute a risk where extreme, too.
  • We are therefore avoiding directional exposure to equities since the dispersion of returns and valuation between regions (mainly US) and sectors (Tech) makes the momentum fragile. We see rising political risk and macro imbalances in EMs.

Recovery Tracker

Graph recovery tracker

 

Asset Class Views

 

Amundi Research
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Markets scenarios & risks - September 2020
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