The past couple of weeks have witnessed a little more volatility in financial markets with equities seeing some brief selloffs blamed on waning risk appetite based on concerns that the Covid-19 Delta variant poses risks to the reopening theme, and potentially the return to ‘normality’ into 2022. The market selloffs have been short-lived, however, and many of the major indices remain very close to or at all-time highs.
The same cannot be said for some of the Asian indices, not least the Hang Seng tech index, down 43% off its February highs this week before bouncing in the last few sessions. The wider Hong Kong and Shanghai indices have also been under pressure as a result of the Chinese authorities trying to reign in companies that they view as creating financial stability risk, inequality and challenging the government’s authority. This may well be a China-specific theme, but with risk sentiment a little more fragile thanks to elevated recovery/growth concerns, it is something to watch carefully. The trigger for the sharp selloff in Hong Kong and China this week was news last weekend that the Chinese government intended to reform the education sector such that companies that teach the school curriculums were to be banned from making profits, raising capital or going public. The impact went beyond the education sector in equity markets, with concerns over where the regulation would go next. However, the mood has calmed somewhat in the past 48 hours, helped by the Chinese securities regulator meeting with the major investment banks to reassure that the crackdown on the private education sector “was not intended to hurt companies elsewhere”.
The International Monetary Fund updated their global economic outlook and maintained their global growth forecast of 6.0% for 2021, while upgrading 2022 from 4.4% to 4.9%. The upgrade to the IMF’s 2022 forecast is driven by the fiscal support measures expected in the US and the EU via the Recovery Fund. While the 2021 forecast remained unchanged overall, the IMF downgraded their expectations for emerging markets, to 6.3% growth, and upgraded developed markets, to 5.6%. The IMF said that “vaccine access has emerged as the principal fault time along which the global economy splits into two blocs – those that can look forward to further normalisation of activity later this year – almost all advanced economies – and those that will still face resurgent infections and rising death tolls”. The risks to their growth forecasts were to the downside, noting that the speed of the vaccine rollouts poses risks from further mutations in the Covid-19 virus. They also made clear that central banks have an important role in their messaging in shaping expectations around inflation and safeguarding against a tightening of financial conditions. The IMF noted that they viewed recent price pressures as reflecting for the most part unusual pandemic related developments and transitory supply/demand mismatches. They expect inflation to return to the pre-pandemic ranges in 2022 once the disturbances have worked through the system, but also noted risks from elevated inflation in emerging markets driven by rising food prices. IMF Chief Economist Gita Gopinath said that “the recovery is not assured until the pandemic is beaten back globally” and noted that divergences in policy support will increase the divide between developed and emerging markets. Gopinath said that the $4.6 trillion of announced fiscal support in advanced economies for 2021 and beyond contrasts with monetary and fiscal tightening that has been witnessed in Brazil, Hungary, Mexico, Russia and Turkey. Gopinath called for “concerted, well directed policy actions at the multilateral and national level” to be able to “make the difference between a future where all economies experience durable recoveries, or one where divergences intensify and social unrest and geopolitical tensions grow”.
We’ve seen two of the major central banks meeting over the past fortnight, and while there were no policy changes announced, the US Federal Reserve (Fed) continued to give hints that the tapering of asset purchases is on the horizon. The Fed voted unanimously to keep rates unchanged and asset purchases at a rate of $120 billion / month with the meeting statement saying that the “economy has made progress” towards the Fed’s goals of maximum employment and price stability, and the Fed will “continue to assess progress in coming meetings”. Fed Chair Jay Powell told the subsequent press conference that the Fed had taken its first “deep dive” into how to go about tapering asset purchases, and on inflation Powell continued to argue that the current inflation levels (the highest since 2008) are “largely reflecting transitory factors”, noting that for each component causing high inflation there was a reopening story tied to it. Financial markets were unmoved by the Fed meeting, with expectations that we will likely see further signalling of a tapering of asset purchases at the Fed conference at Jackson Hole in late August and then a formal decision at some point in the fourth quarter. The European Central Bank (ECB) also left policy unchanged but updated their forward guidance, saying they expect rates to remain “at their present or lower levels” until they see inflation reaching 2% within their forecast horizon and for the duration of the forecast horizon. Given that the ECB are forecasting inflation of 1.5% in 2022 and 1.4% in 2023, this guidance was seen as a dovish statement given that the ECB does not see inflation anywhere near their target in the next 2 ½ years. Hence inflation has a long way to go before it reaches levels consistent with interest rates moving higher, not least when the ECB also included in the guidance an allowance for inflation to overshoot above 2% for a time. ECB President Christine Lagarde was cautious on ending asset purchases, saying an exit from the program would be premature amid the uncertainty of the Delta variant.
In terms of the pandemic, the Delta variant continues to push global case numbers higher, but closer to home the drop off in case numbers in the UK has left the predictions of 100,000 cases a day by mid-August looking wide of the mark. UK case numbers in the latest wave peaked on 17 July at just under 60,000 new cases a day since when the growth in new daily case numbers has fallen back – yesterday saw 31,117 cases, with the 7 day total down 37.1% on the previous week. It may be the case that the Euro 2020 football tournament and increased social mixing caused a ‘spike’ in case numbers and we are now reverting to the previous trend. The end of the Euro 2020 tournament has helped slow case growth amongst males aged 15-40, the start of the school holidays has helped reduce social mixing; the end of the restrictions on July 19th has not seen a spike in social contacts, and the better weather (notwithstanding the storm my family endured whilst camping in Dorset last night) has helped reduce indoor mixing. It’s too early to draw too many conclusions, and there remain questions over had bad the autumn and winter will be, as schools return, social contact moves back indoors, and the NHS faces seasonal pressures outside of Covid. All the same, the UK numbers are certainly encouraging and point to the ability of a highly vaccinated population to avoid the worst-case scenarios associated with a highly contagious strain of Covid. What we will be looking out for in England next is the hospitalisation numbers to roll over – and Scotland is a useful template in this respect having seen their Euro 2020 ‘spike’ end a lot sooner meaning that case numbers, and in turn hospitalisations have been seen to turn a corner.
The UK experience also offers hope for other European countries, where vaccination rates are rising strongly. Indeed, Germany, Spain and Italy have now overtaken the USA in terms of the percentage of the population that is fully vaccinated, and France is not far behind. The vaccine rollout in the US does appear to have plateaued, and unfortunately it has done so at levels which mean that the Delta variant will push case numbers higher over the coming weeks in areas where vaccination rates are low. Anthony Fauci, Chief Medical Advisor to President Biden, warned that “the outbreak is an outbreak among the unvaccinated predominately, not exclusively, but overwhelmingly”. He added “we could be in trouble if we don’t do a much better job of getting a lot more people vaccinated”. It appears the US government will mandate all Federal employees to be vaccinated or subject themselves to regular testing; meanwhile New York state is handing out $100 to people that come forwards for their first vaccine dose, with the President encouraging other states to make use of their stimulus funds to follow suit. It does seem that we have reached the point where people need to be incentivised to have a vaccine either through financial means or by making life inconvenient for those that choose not to be vaccinated.