The dichotomy between the false market tranquillity and the high level of uncertainty about the length of the crisis and its long-term implications is striking. In our view, we are far from being out of the woods and investors should stay alert as current market levels are still pricing in a ‘too rosy too soon’ endgame. The race between the three cycles will continue.
On the pandemic cycle, markets have been relying on the narrative that the worst may be behind us in Europe and the US, with rising expectations of contagion curve-flattening. If these hopes are not realised, market tensions will resurface. On the economic front, the huge fiscal and monetary measures are like an insurance policy for the next six months, but should the recession prove worse than expected, markets will need more and any disappointment will trigger a correction. ‘Credit’ is becoming addicted to CB action; market conditions have improved but not normalised.
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