Macro Analysis /

UniCredit Macro & Markets Weekly - ECB unlikely to give the green light to reflation trades

    Marco Valli
    Marco Valli

    Head of Macro Research

    15 January 2021
    Published byUniCredit
    • Macro: We expect the ECB to remain dovish on Thursday. Italy’s PM Conte is likely to ask for a confidence vote in parliament (Monday and Tuesday), while eurozone PMIs will probably decline across the board (released on Friday). We forecast China’s GDP to have expanded by 2.4% qoq, 6.2% yoy in 4Q20 (due on Monday).
    • FI: A dovish ECB is likely to prevent core EGBs from following the US “reflation” story, with the 10Y UST-Bund spread expected to widen further in the short term. As we do not expect early elections to be called in Italy, a further widening in the 10Y BTP-Bund spread offers an attractive level at which to accumulate BTP exposure.
    • FX: The USD may still receive some short-term support from the rise in US long-term yields. However, this is unlikely to reverse our medium-term scenario, in which the greenback is set to lose its appeal as a safe-haven asset as the global economic and risk picture improves.
    • Equities: Overbought equity markets and considerable long positions increase the likelihood of an equity market setback. However, this would offer a good buying opportunity.
    • Credit: HY NFI bond spreads closed 2020 a touch wider than at the beginning of the year, but the remarkable risk-on tone of 4Q20 has faded for now. We see any consolidation in the near term as an opportunity for investors to add HY credit exposure.