there is a risk of further instability in the financial markets

Consequently, the current economic dynamic should continue its course across the Atlantic. We already estimate a recovery rate in previously frozen sectors (catering, hotels, air transport and leisure) of around 50%. And regular labor market data suggests continued strengthening in most states in the United States. Therefore, this country’s GDP growth above 7% in 2021 is now achievable.

Joe biden

The President of the United States, Joe Biden, has presented a plan that will allocate the greatest wealth of the country to finance social policies.

Photo: Swimming pool

However, this combination of consumer demand that can finally be satisfied and a seemingly limitless budget support program fuels the hypothesis of possible overheating; in other words, growth accompanied by inflationary pressures. This situation raises the Federal Reserve a dilemma: You have to decide between the risk of overheating and the risk of a market downturn.

By delaying the tightening of its monetary policy, the Fed is fueling fears of runaway inflation in the future and contributing to the rise in long rates, posing a risk not only to the valuation of financial assets, but also to various sectors of the economy. activity, starting with real estate. In exchange, a Fed monetary adjustment would surely raise market interest rates in the short term, generating a similar risk for the prosecution and even for economic activity itself. In this difficult situation for the Fed, we have adopted a very active management of the risk of rising interest rates in our bond portfolios.

In Europe, the accumulated delays in vaccination campaigns are becoming very costly for the region due to the imposition of new restrictions on economic activity, inevitable for several more months. It will be difficult for European growth to exceed 4% this year, despite a particularly favorable base effect. This lag in the business cycle, also due to modest stimulus packages compared to those in the United States, has at least had the advantage so far of putting less pressure on interest rates.

However, markets and the economy are global phenomena. However, Today, we cannot underestimate the likelihood that Europe will close the gap, especially with the long-awaited acceleration in the vaccination rate. This situation has recently led us to be more cautious on the European bond markets.

For now, the enthusiasm for the economic rebound is outweighing, in investor psychology, the risks of overheating, sustained inflation and excessive interest rate hikes, which may seem a bit fanciful – and with good reason – especially from the European prism. However, the balance of financial markets is unstable.

As risk managers, and given the boost that has been given to the US economy, we cannot rule out the possibility of a decade-long paradigm shift in the markets. As in the late 1690s, the United States underwent a radical change in its economic policy. And as at the time when “American exceptionalism” was no longer enough to mask the enormous accumulated deficits, the dollar could end up bearing the consequences for the benefit of the emerging universe.

The data for the coming months, both economic and political, could be decisive for the materialization of a new trend in the markets. In the meantime, and in this context, our management in the coming months will continue to be characterized by a portfolio structuring centered on long-term convictions – some of which are even reinforced by the American budgetary orientation, such as the energy transition – and monitoring – closely linked to the build-up of market imbalances.