Market Views

GLOBAL CREDIT BULLETS | Monday, 21st December 2020

Virus – Never a break.
During the weekend, the UK has imposed stricter restrictions due to a sudden surge in cases over the past week. The increase is due to a new Covid strain, which transmits faster, according to experts. While the vaccine should ultimately work on this mutation too, lockdowns and travel restrictions in Europe are likely to be higher than anticipated over the next few months. The market is thus likely to remove some of the upbeat expectations factored in asset prices.

Fed – No Christmas gift.
The Federal Reserve refrained from dovish action in its latest meeting of 2020. Last week, the FOMC chose not to extend the average maturity of asset purchases, keeping the bulk on the front-end of the curve. Economic forecasts turned more positive for 2021, but guidance remains accommodative for long. While central banks are far from turning hawkish, 4Q20 may have represented the “high point” in monetary accommodation. Long-end rates may thus finally have some gradual upside from current levels, especially if 1H21 show a rebound in economic activity.

Brexit – No deal at the horizon.
The UK has missed the deadline imposed by the European Parliament for a Brexit deal (Dec, 20th). Talks are thus likely to continue over the week and potentially after Christmas, with chances of a hard Brexit going up by the day. Coupled with the negative UK virus news, delays suggest further downside for UK assets into year-end.

US fiscal – Habemus stimulus.
Late on Sunday, US party leaders finally struck a deal on the Covid relief plan. The new bills should be voted in Congress on Monday. The plan should bring $900bn in new stimulus, mostly focusing on employment and small businesses support. While this is a clear positive, markets were pricing high chances of new stimulus at this point. The package though may support US assets vs Europe, especially given the sudden increase in restrictions in UK and part of the Continent.

To read more on our latest views, please see our Silver Bullet | The New Bond Vigilantes or visit our Insights section.

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