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The good cop, bad cop approach

To call financial markets a constant stand-off may be a truism, as buyers and sellers disagree by definition. Yet looking at the usual narratives in the investment world, stand-offs are currently ubiquitous. Can we anticipate the same for the climate change summit in Glasgow?




Key take-aways

  • It is all about stand-offs in financial markets. This week, prices will be moved more by the central banks than by the stand-off on climate change at the COP26 summit.
  • We expect the year-end rally to continue.

The past few weeks have mostly been about central banks being challenged by financial markets about rate trajectories. Whereas the average central bank message has been ‘not so fast’, interest-rate markets are calling for a series of rate hikes as early as 2022. This is creating a divergence between central banks in emerging markets and other commodity-rich economies, which have already started to hike rates or are about to do so, and their colleagues at the helm of monetary policy in mature economies, who are dealing with a reversal of their quantitative easing tools first. Last week, the European Central Bank (ECB) made a somewhat half-hearted statement to fend off rate-hike fantasies, and, more importantly, the US Federal Reserve will give it a shot this week. In any case, the difference between mature vs emerging economies is the fact that emerging markets are price-takers and have hardly any unconventional measures to reverse. The jury is still out on who will be the good cop vs the bad cop this time around.

In the meantime, the headlines will be dominated by the climate change summit in Glasgow, where the stand-off is quite invisible. In fact, there seems to be a consensus to ‘agree to disagree’: emission goals are confirmed, but the related deadlines are completely blurred to avoid open controversy. It is hard to see a game-changing moment here. For investors, it is all about understanding transition risks and opportunities as well as the physical risks climate change brings to
the economy and to their investment portfolios (see our number of the week).

Year-end rally
So the year-end rally in risk assets is set to continue. We have highlighted single stocks worth buying but have upgraded the USD vs the EUR after the terms of trade and valuations have tipped in favour of the dollar. However, we reiterate our Overweight rating for European peripheral bonds, as the ECB will be able to fend off doubts about their support.

Number of the week

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