Source: Unigestion, Bloomberg, as of 8 July 2021.
Of the multiple events that could derail a superb H1, there are two holding our attention, one “upside risk” and one “downside risk”.
The first regards inflation and central bank actions. There has been a shift recently in the perception of the transitory nature of inflation pressures, both in the US and other countries. In line with our “stronger for longer” scenario on growth, inflation could surprise for longer and imply a faster-than-expected reduction in accommodation (tapering) and an earlier lift-off in rates.
The second risk is a repricing of growth expectations as a result of pre-emptive measures taken by governments to anticipate a fourth wave in the pandemic, postponing again the complete reopening of the world economy and choking investor optimism with uncertainty. We believe that this risk remains contained due to vaccine efficacy and a much higher proportion of vaccinated people.
We allocate a greater probability to the upside risk than to the one of marked macro deceleration. In any case, investor complacency towards these potential sentiment disruptors has reached levels unseen since early May, when markets dropped 5% in a few days, a healthy correction back then.
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