Market Compass July 2021

In Short

Edited by the Macro & Market Research Team. The team of analysts based in Paris, Cologne, Trieste, Milan and Prague runs qualitative and quantitative analysis on macroeconomic and financial issues. The team translates macro and quant views into investment ideas that feed into the investment process.
Market Outlook

Highlights:

  • The policy unwind will be slow, while economic growth will stay above potential in 21H2.
  • US inflation has surged. The shock is partly transitory, yet inflation may not return to the very muted pre-Covid trends. The Fed will navigate between the opposite risks of unplugging policy support too quickly and losing control of inflation expectations.
  • The Fed’s new strategy lacks clarity and occasional re-interpretation will cause volatility, calling for stronger use of hedges. We still expect the cautious approach to support a slow transition from early to mid financial cycle.
  • The rising stock-bond correlation is bad news for diversification. We retain a positive risk stance but scale down our equity overweight, both in size and structure (long Value vs. Growth). Credit remains a good carry trade, even at that level of spreads. We recommend UW Govies and short duration.

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Market Compass July 2021
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