Weekly Market Update: Markets rise as Powell reiterates patient approach

Market Update

Global equities rebounded last week after a period of weak performance. US equities led the way in Sterling terms, up +2.1%. UK, European and emerging market equities gained +1.8%, +1.1% and +0.8% respectively. Although up in local terms, weak Yen performance saw Japanese equities fall -0.3% in Sterling terms. US equities are now trading at all-time highs, despite mixed news on President Joe Biden’s infrastructure plan, which now looks most likely to be limited to $1tn over ten years unless Democrats can pass legislation through reconciliation. It was another strong week for cyclical stocks, with energy, financials and materials the three best performing sectors globally. Sterling gained +0.5% vs the US Dollar, although was marginally down vs the Euro. Yields were up globally, particularly in the UK where 10Y gilt yields ended the week at 1.524%. In US Dollar terms oil rose +3.6% while gold gained +1.0%.

CIO Analysis

Central banks continue to believe that supply-side inflation is temporary. However, to gauge inflation and growth, investors would do well to keep one eye on the central banks and money markets and the other on the development of the pandemic.

As the Delta variant hits the European continent, worries are peaking again. Talking about a post-Covid environment may be premature and we may have to learn to live with the pandemic for some time. This places the ‘Fed Put’ thesis in danger, as supply chain problems may force inflation higher, eventually exhausting the Fed’s patience.

Yet things may not be so dramatic from an investment perspective. Higher rates are not a remedy for all types of inflation. There’s still a distinct probability that central bankers acknowledge that supply chain problems will probably not be solved with higher interest rates, i.e. that this inflation cycle may not affect the Fed’s ability to suppress volatility. While this would broaden the chasm between the real and the financial economy, clear central bank thinking could ensure the avoidance of major disruptions for risk assets.

-David Baker, CIO

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