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The Second Wave is Here

Cross asset weekly pic
The number of new Covid-19 infections has accelerated sharply in the past few weeks, both in Europe and the US. European governments have been introducing much tighter restrictions on social interaction to bring infection rates down to more manageable levels. These will have a significant negative impact on economic growth in the fourth quarter. Across the Atlantic, the economic recovery, so far, has been impressive and US fundamentals remain encouraging. Yet the path of the expansion is highly dependent on the development of the pandemic as well as on the fiscal response. The election results next week will be a key factor determining the size and timing of the next stimulus.
Expectations for a democratic sweep and improving macro data have led to a significant steepening of the US yield curve. Extreme positioning from leveraged accounts could lead to a near-term reversal of this trend, which may be triggered by either negative news from the Covid front or a US election surprise. However, any flattening would likely prove temporary as we continue to expect a steeper US yield curve over the coming 6 to 12 months.
Equity markets have corrected sharply in recent days, with moves most pronounced in the euro area, triggered by the unabated rise in Covid-19 infection numbers. US equities appear slightly better placed as they benefit from more favorable economic data, better earnings momentum, as well as a potential fiscal boost after election day and higher exposure to firms which benefit from Covid-induced shifts in consumption and investment.
Finally, low infection rates and less stringent virus containment measures allow Japan to operate its economy at a higher level of activity than most other G10 economies, which along with attractive real yields should be positive for the Japanese Yen.

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