Weekly Market Update: stocks retreat from previous highs

Market Update

Global equities fell -0.3% last week in Sterling terms, with a stark dispersion in returns. UK equities fell the most, down -1.6%, with US and European equities falling -0.4% and -0.3% respectively. Energy stocks were the worst performing globally, with financials also weak, both of which contributed to the UK’s underperformance. However Japanese equities rose +1.7% and emerging market equities +2.3%, both making up ground having underperformed in recent weeks. Continued dovish comments from central banks saw yields continue to fall, with US 10Y Treasury yields down nearly 7bps. There was also a flattening of yield curves across developed markets. In Sterling terms Gilts gained +0.7% and global bonds +0.5%. OPEC agreed to a cut in production, although this did not stop oil falling -3.7% in US Dollar terms. Meanwhile gold gained +0.2% in US Dollar terms.

CIO Analysis

Last week saw stronger aggregate demand and, expectedly, more inflation across the board. It also featured a soothing speech by Jay Powell that inflation is temporary, although a growing number of investors harbour doubts as to whether this reflects an independent estimate or the preference of a central bank with no exit strategy from financial repression. 

However, the important news of the week is reflected in the dichotomy between the growing number of Covid-19 cases worldwide and further easing of restrictions. On the one hand, the Delta variant is spreading across the globe and vaccination levels are low. On the other, governments in the West are now exhibiting signs of Covid-weariness. The political and economic toll of movement restrictions for over a year is tilting the scale towards economic re-openings, even at the risk of higher mortalities and stricter closures in the Autumn.

The second half of 2021 may feature a less cautious approach against the pandemic especially from developed nations. The strategy shifts from ‘beating the virus’ to ‘learning to live with Covid’. In terms of inflation, supply pressures, further variants, vaccination rates, freedom of movement, fiscal and monetary stimulus, and bottom-line earnings, the implications may even be significant enough for investment managers and asset allocators to eventually consider a re-rating of risk assets in the foreseeable future. – David Baker, CIO

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