September update

Markets have rallied sharply from their virus lows, driven by the policy revolution and economic restart. Tighter valuations increase the risk of further market volatility, particularly ahead of the divisive U.S. elections. Against this backdrop we stay moderately pro-risk on a tactical basis, with a preference for credit.

The activity restart has broadened. Yet it is moving at different speeds between countries, driven by differences in dealing with virus dynamics. The lower incidence of new deaths partly explains the relatively muted market response to a renewed rise in infections. The timeline for a vaccine has surprised to the upside following accelerated efforts worldwide. Yet immunization is not a panacea for the economy and a recovery to pre-Covid levels will take time.

An unprecedented joint monetary-fiscal policy response is providing a bridge for disrupted income streams. Fiscal stimulus fatigue is becoming a risk – especially in the U.S. – even as Europe has stepped up its fiscal support. The Fed’s new monetary policy framework is set to have significant implications for inflation outcomes as it allows for inflation overshoots and doesn’t worry about labor markets overheating. Combined with structural changes accelerated by Covid-19, such as deglobalization, we see a higher inflation regime in the medium term.