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A rolling thunder, a pouring rain

The second pandemic wave hitting the West has come earlier and faster than many expected, and containment measures are burdening the economic prospects for winter 2020/2021. For economists, though, the output for full-year 2020 is almost unaffected, as the third-quarter recovery was likely stronger than anticipated and has thus already made up for a likely slowdown in activity during the last quarter of the year.

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For investors’ risk appetite, on the other hand, the second wave makes all the difference. The déjà vu of spring 2020 is far from compelling, but quite a few things have changed since then: knowledge about the health risks and treatments, the policy response (i.e. ‘all-in’ from central banks and governments), the containment approach (more targeted and timelier), as well as the response from economic participants and investors, who have learned to be flexible.

Against this backdrop, we struggle to see the recent deterioration on the health front as a reason to avoid all the risk assets available in financial markets. On the contrary, we think there is an increasing set of opportunities out there. Take oil, for instance. We have tweaked the numbers down slightly due to concerns about the pandemic and the prospects of higher supplies. Yet we struggle to see further downside, given the excessive bearishness of positioning in the futures markets. Oil prices have a fair chance of recovering to the high USD 40s in the coming months. Speaking of cyclical risks, we highlight the upgrading of European mid caps by our technical analysis team. Mid caps in general, and in particular for Europe, are quite a cyclical proxy in equity markets. Most recently, the indices in the space gave a buy signal that should favour continuing outperformance.

As for safe-haven assets, the growth angst of investors can be seen in the recent auctions of European Union bonds (see number of the week). Yet we think the supply and liquidity of these bonds must be ramped up in 2021 before they fit the bill as a real alternative to standard safe havens.