By: BNP Paribas Markets 360 team
We remain positive on risk assets, based on our expectation that real yields will remain low, as central banks continue to flood the market with liquidity.
- Continued divergence in the global economic performance: We expect the economic recovery to remain uneven across countries and sectors.
- Inflation to remain below target in most countries: We think the large amount of economic slack is likely to outweigh supply-induced upward pressure over the next twelve months or so.
- Policy support to continue: Additional monetary policy accommodation will create additional fiscal space, we believe.
- The key risk of the US election (in addition to Brexit and US-China tensions): The outcome could have a significant impact on equities, in particular, as we discuss in our US election focus.
- Persistent Covid-19 uncertainty: A second wave of Covid-19 infections could weigh on demand, but our forecasts assume new national lockdowns will be avoided.
- Policy and cost to accelerate green financing: We expect to see a rebound in green bond issuance in Q4 and into H1 2021, with Germany likely to issue a second green bond later this year.
Key Market views:
- Bullish Credit: In Europe, we expect solid demand for scarce corporate bonds, supported by ECB purchases, to tighten spreads. In the US, issuers are managing for bondholders, the default cycle is peaking and yields are low, making credit risk more attractive than duration.
- Guardedly optimistic equities: We expect equities to remain supported by monetary and fiscal stimuli which will keep real rates low and boost inflation expectations (breakevens). We are more positive on European than US equities. Our ESG long/short basket offers exposure to the important sustainability theme.
- Bearish USD: We expect the currency to continue to weaken. In contrast, we think the JPY is set for structural appreciation.
- Steepening bias: In the US, we continue to favour long TIPS breakevens and steepeners, particularly at the long end of the curve. In Europe, we expect a limited steepening in core and swap curves going into the year end.
- Bullish peripherals: Eurozone peripheral spreads are likely to narrow further in Q4.
- Neutral or long EM assets: Abundant liquidity and a weaker USD remain supportive of EM assets, but we think caution is needed going into Q4 after the large rally.
- Bullish oil: Prices look set to rise as the USD weakens and an acceleration of inventory draws helps the market to rebalance.