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On the cusp to normalisation

Cross asset weekly pic
The slow vaccination rollout in the EU continues to weigh on the region’s economic outlook. This should change in the months ahead. A ramp up in supply should accelerate vaccination campaigns and allow restrictions to be gradually relaxed ahead of summer. As a result, we leave our euro area GDP growth forecasts unchanged. In the US, we also keep our 2021 GDP growth forecast at 6.9%, but highlight upside risks to our 2022 forecast of 3.7% if President Biden’s ‘build back better’ plan were to be enacted fully.
The short-term upside for US yields looks limited from here. After the significant repricing of US rates year-to-date, the likely moderation in the momentum of the US manufacturing sector reduces tailwinds in the near term. In Europe, we expect euro area and UK yield curves to steepen further as policy rate expectations remain low and the economies should reopen progressively. We continue to favour High Yield over Investment Grade credit. With the rally in bond yields recently coming to a halt, FX markets are likely to refocus on the high US funding needs and cyclical forces, which should put the US dollar back on its projected longer-term downward trend. We maintain our conviction that particularly the euro should benefit – with a delay though compared to our previous forecast.
In equities, we selectively adjust our regional and sector preferences to reflect a changing market environment. More limited headwinds from rising rates allow to venture into the more defensive and attractively valued end of the equity market. We caution against adding further outright cyclicals exposure and prefer to be selective among defensives. European pharma stands out in our view as an attractively valued reopening play, but also food & beverages. We think Swiss equities look attractive and caution against adding to Emerging Markets exposure. Lastly, we lift our end 2021 S&P500 target to 4300 but warn against adding too much risk at the current juncture, as market pricing looks stretched.

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