Now the hard part

Now the hard part. Risk assets have performed strongly this year but now need the green shoots to translate into stronger hard data. There is still room for positioning adjustment to feed the rally, but expect it to turn less smooth and forceful.

Highlights:

  • Now the hard part. Risk assets have performed strongly this year but now need the green shoots to translate into stronger hard data. There is still room for positioning adjustment to feed the rally, but expect it to turn less smooth and forceful.
  • Trade talks, especially US/EU, remain a major risk, but we assume that Trump will not take any major self-defeating action ahead of the 2020 election.
  • Inflation has continued to undershoot, which is at the heart of the dovish CB stance and low bond yields. The balance of risks in the near term remains tilted towards further dovish surprises.
  • We keep a pro-risk bias, with a prudent overweight in equities, a larger one in Credit and an underweight in Govies. Our duration extension in Credit was well timed; we see residual value in long-dated Credit, as opposed to Govies.

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NOW THE HARD PART

RELATED INSIGHTS

CHINA’S Q4 GDP GROWTH SURPRISED ON THE UPSIDE, BUT RISKS TO THE OUTLOOK HAVE INCREASED
This morning, China published its Q4 GDP growth alongside with December monthly activity data. Q4 growth accelerated to 6.5% yoy which lifted total 2020 GDP to 2.3%. December real activity data were more mixed. While exports came in strongly, important domestic demand components were a bit unsteady.
COVID-19 FACTS & FIGURES
US President-elect Joe Biden has unveiled a $1.9 trillion stimulus package proposal. Following the recent increase in cases, China has imposed new restrictions and lockdowns in the Hebei province. Canada has implemented new restrictions and a provincewide curfew in Quebec that will last until February 8. German Chancellor Angela Merkel warned that the recent rise in Covid-19 cases could force the country to prolong the nationwide lockdown until April.
EQUITIES: STAY POSITIVE WITH A VALUE-CYCLICAL TILT
Following a monster rally in stocks last autumn, multiples are well above historical averages, but equity investors can count on lingering low yields, tighter credit spreads and increasing central banks’ balance sheets which in turn maintain low the cost of equity and the discount rate of future cash flows.