Lockdown – Back home.
Rising hospitalisation rates pushed European countries back into soft lockdowns. Measures are less strict than in April, but they will be enough for a decent downgrade of 4Q20 growth forecasts. Equity markets have taken a hit, while credit has resisted. We believe credit will remain more supported, thanks to monetary policy and fiscal help. We see potential for some more volatility into year end, especially as the market may focus on potential US restrictions once elections are off the way. US equities and credit seems more at risk than European equities in a lockdown case, as they both lagged the move weaker. The outlook for a vaccine in early 2021 and monetary stimulus may cap the downside, so any selloff will be much milder than in March. Asia will continue to outperform as lockdowns are not in sight.

Election Tuesday – Watch FL, NC, PA.
Our latest probabilities assign 87% chances to a Biden win and 61% chances to a Blue wave scenario. Strong voter turnout has continued over the weekend with 93mn of people having voted so far, which represents 68% of total 2016 votes. Our base case remains that of a Biden win, which in our view confirms the case for value trades, inflation, and non-US assets to outperform and for the Dollar and Treasuries to underperform. Clearly the stamina of the Biden trade will also depend on the US lockdown outlook post-elections. In regard to election night, Florida, Arizona and North Carolina are key to watch as a Biden win in either could mean a clear result on November 4. If Biden were to lose all of them (unlikely scenario, based on polls), we would need to wait for Pennsylvania, to assess his victory. This could take up to 1 and 2 weeks from the election night given the tabulation start date and ballot deadlines.

ECB – Wait for Christmas.
The ECB meeting last week painted a bleaker outlook for 4Q20 but refrained from acting for now. Instead, stimulus at the December meeting was telegraphed to markets. In the last meeting of the year, we are likely to see a €400-500bn increase in PEPP purchases, an expansion of the TLTRO program, and a broadening of eligible assets for purchases (e.g. “fallen angels”). This package currently lies at the dovish side of consensus, and hence could provide a good backstop for any lockdown weakness in November. The Fed this week will likely hold policy too, given the elections uncertainty, so any re-assessment will be in December. Upcoming ECB stimulus is likely to cap downside on credit from here, together with aid from governments to strategic firms.

China – Opening up.
The Central Committee of the Communist Party released details on the new five-year plan. While a growth target was not specified, the Committee pledged a strong commitment to liberalise the capital account. As the focus moves away from export-led growth to focus on innovation and the consumer, the politburo is likely to allow more capital inflows into the country. Chinese bonds and equities remain underweight in global portfolios, so that further liberalization will be a strong tailwind for Chinese asset prices. Short-term, CNH and equities have more room given positive-growth momentum in Asia. Strong 3Q GDP and the recent beat on PMIs point in this direction. Chinese local bonds are headed to attract investor attention in 2021 too given tight monetary policy and a lack of global safe havens.

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