Q2 2021

Capital Markets Outlook

Calendar Icon April 2021

Print Summary

Highlights

Macro

  • US growth pushes higher, thanks to massive fiscal support
  • Inflation forecasts remain rangebound

Rates

  • Long yields, mix of inflation expectations and real yields drive curve steepening
  • Focus on regions less likely to see yield increases

Credit

  • US IG credit should be supported by solid growth and technicals
  • European credit offers value

Emerging-Market Debt (EMD)

  • Emerging markets (EM) should benefit from global growth recovery and search for yield
  • Favor hard-currency sovereigns

Equity

  • Stocks have done well amid moderate inflation and rising rates in the past
  • Value opportunities remains but be selective
Macro
Rates
Credit
EMD
Equity

Macro

US Growth Expectations Decouple from Europe, Thanks to Massive Fiscal Support

US Growth Should Return/Surpass the Precrisis Trend in the Near Term

As of March 31, 2021. Source: Haver Analytics, Refinitiv and AB

US Real GDP Forecast and Precrisis Path


Growth in Europe Unlikely to Return to Precrisis Trend Any Time Soon

As of March 31, 2021. Source: Haver Analytics, Refinitiv and AB

Euro-Area Real GDP Forecast and Precrisis Path


While US Government Debt Has Grown, Servicing Costs Remain Under Control (Percent)

As of December 31, 2020. Source: Haver Analytics, Refinitiv and AB


Historical analysis does not guarantee future results.

Rates

While the Fed Plans to Keep Official Rates Near Zero, Longer-Maturity Yields Could See Some More Pressure

The Fed Projects Higher Growth and Above-Target Inflation, but Expects to Keep Rates Near Zero Through 2023

As of March 31, 2021. Source: Bloomberg, US Federal Reserve and AB

Fed Dot Plot and Forecasts*


The Yield Curve Has Steepened Significantly, a Trend That May Continue

As of March 31, 2021. Source: Bloomberg, US Federal Reserve and AB

Two-Year vs. 10-Year US Treasury Spread


Inflation Likely to Spike in Near Term from “Base Effects”†

As of March 31, 2021. Source: Bloomberg, US Federal Reserve and AB

YoY US Core Inflation, Assuming Constant Monthly Growth


Historical analysis and current forecasts do not guarantee future results.
*Fed inflation and real growth forecast as of March 17, 2021, release—inflation is core Personal Consumption Expenditure inflation
†Year-over-year US Core Consumer Price Index changes, assuming 0.15% month-over-month increases throughout 2021

Credit

US IG Credit Should Be Supported by Solid Growth and Technicals

Spreads Are Tighter, but Strong Growth Is Supportive of US IG Credit

As of March 31, 2021
Source: Bloomberg, Bloomberg Barclays, Haver Analytics and J.P. Morgan

US IG Spreads and US Composite PMI


Lower Hedging Cost Should Contribute to Foreign Demand

As of March 31, 2021
Source: Bloomberg, Bloomberg Barclays, Haver Analytics and J.P. Morgan

Annualized FX Hedging Cost


IG Bond Issuance Fell 12% YoY and Is Expected to Remain Lower

As of March 31, 2021
Source: Bloomberg, Bloomberg Barclays, Haver Analytics and J.P. Morgan

IG Gross Issuance


Past performance does not guarantee future results.
IG: investment-grade; OAS: option-adjusted spreads
Bloomberg Barclays US IG Corporate Index monthly from January 31, 2001, through March 31, 2021

EMD

EM Can Help to Boost Returns and Benefit from Positive Developments

Flows Rebound as Investors Look for Yield

As of March 31, 2021
Source: Bloomberg, IHS Markit, J.P. Morgan, S&P and AB

Cumulative Hard-Currency Fund Flows


Issuance Is Expected to Decline

As of March 31, 2021
Source: Bloomberg, IHS Markit, J.P. Morgan, S&P and AB

Sovereign Net Issuance (USD Billions)


EM Has Performed Well in Prior Rising-Rate Environments*

As of March 31, 2021
Source: Bloomberg, IHS Markit, J.P. Morgan, S&P and AB


Historical analysis does not guarantee future results.
CEMBI: corporate emerging market index; EM: emerging markets; EMBI: EM bond index; HY: high-yield EM sovereign is J.P. Morgan EMBI Global Diversified, EM Corp. is J.P. Morgan CEMBI Broad Diversified.
*Dates represent time periods where 10-Year US Treasury yields increased by at least 50 basis points or greater.

Equity

Stocks Have Done Well Amid Moderate Inflation and Rising Rates in the Past

S&P 500: Average Quarterly Return in Different Inflation Environments

As of December 31, 2020.
Source: FactSet, Federal Reserve Bank of St. Louis, MSCI, S&P and AB

1948-2020 (Percent)


MSCI World Returns in Rising Rate Periods

As of March 22, 2021.
Source: FactSet, Federal Reserve Bank of St. Louis, MSCI, S&P and AB

Annualized (Percent)


Past performance and current analysis do not guarantee future results.
*Based on peak to trough rate cycles for the corresponding periods of the MSCI World index. Rising-rate environments are defined as periods during which the US 10-year Treasury yield rose by more than 70 basis points.

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