A dual recovery for trade, consumers and investors. First, despite a stronger-than-expected recovery in goods trade worldwide, the U.S. and Western Europe are trailing China, Emerging Asia and Eastern Europe’s export recovery. In 2020, we forecast a fall in global trade in goods and services by -13% (vs.-11% in 2009) in volume terms, leading to USD4tn of trade losses. In 2021, we forecast a +7% technical rebound but expect a return to pre-crisis levels only in 2023 as services continue to struggle and calls for de-globalization emerge. Meanwhile, a loss of purchasing power for the most fragile households will be hard to recover. The asymmetric exposure to job losses meant young, less qualified and part-time workers were hit the hardest, implying a K-shaped or “dual” recovery in consumer spending ahead.

Political risk could be back like a boomerang. Odds for a no-deal Brexit have risen to 45%, while the U.S. elections are paving the way for a new fiscal cliff and a judici-ary dispute at the end of the year. In 2021, the tech war between the U.S. and China, tensions in the Mediterranean Sea and the U.S.-Russia dispute will remain top of mind. The risk of policy mistakes for Emerging Markets that loosened their fiscal discipline to fight the crisis will rise in 2022: anticipations of higher U.S. rates should ma-terialize then and debt sustainability worries could trigger pressures on EM currencies.

Not the time to take risks. In the current market environment, it is important to con-sider that there is greater economic uncertainty now than at the beginning of the year, despite the current monetary and fiscal policy mix, as well as more geopolitical risks and tighter valuations. In this context, equity markets show a persistent detach-ment from fundamental determinants, making the recent rally hardly justifiable. Because of that we still expect the equity market to underperform in 2020 and to start a muted rally in 2021. When it comes to corporate credit, both investment grade and high-yield corporate spreads look too tight. As in equities, corporate credit markets remain detached from fundamentals on the back of the central banks’ perpetual put option. Hence, we expect corporate spreads to converge to-wards higher values due to higher than expected market volatility and increasing default rates. Lastly, with the short-end of most developed countries’ sovereign yield curves anchored by their respective central banks, we expect a timid curve steepen-ing towards the end of 2020 and 2021. This gradual increase in term premium will occur on the back of higher inflation expectations and a halt in the recent decline of real yields. On the other hand, long-term Emerging Market sovereign spreads look overbought. The combination of this extreme bullish positioning and the current market fragility is a perfect combination for EM assets to become a victim of a sec-ond “risk-off” rotation in the wake of a second risky-assets market correction.

Fiscal and monetary policy: The devil is in the details. EU member states agreed on issuing common debt to boost the recovery in a historical move. Yet the different natures and spending calendars of fiscal policies will matter: countries focusing on (short-term) demand (Germany, U.S., China etc.) could see a faster recovery than those betting on supply (France). Some countries still need to do more (Spain, Italy, the UK). In the immediate crisis aftermath, inflation is likely to remain muted despite these policy impulses; we see it moderately and temporarily overshooting in the US starting in 2022. On the monetary policy side, we expect an acceleration of the U.S. Fed’s securities purchases in H1 2021, with a tapering of its QE program to only start from mid-2022 and a first rate hike in Q3 2023. The ECB should announce an addi-tional EUR500bn in Quantitative Easing in December 2020.