Weekly review: Boris’ virus strategy – gold medal or fall at the first hurdle?

Macro Update 26 July 2021
July 2021
Steven Bell

Steven Bell

Managing Director, Portfolio Manager & Chief Economist, Multi Asset Solutions

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Risk Disclaimer

Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Key takeaways

Boris’ virus strategy: gold medal or fall at the first hurdle?

The world is watching the UK to see if a strategy of living with Covid works. And, after a wobbly start, it’s looking good. The implications for the global economy are enormous.

When Boris Johnson announced that almost all restrictions would be lifted in England – including making mask wearing voluntary – many commentators were amazed. After all, cases of the Delta variant were soaring in the UK. Countries with fewer cases were moving in the opposite direction, tightening restrictions.

Downward trend in cases may be interrupted…

Several weeks later, the trend in new cases in the UK is firmly downward. More importantly, the number of hospital admissions is lower than even the most optimistic scenario projected by the expert advisers to the government. The downward trend in new cases may well be interrupted as people enjoy the new-found freedoms, but as long as the pressures on the health service remain containable, the UK will have demonstrated that vaccination can beat the virus.

…but the UK’s strategy could provide a pro-risk boost

Other countries with high vaccination rates, notably the US and Europe, will surely follow suit. The equity markets have stumbled recently as cases of Covid have picked up around the world but the example of the UK could well usher in a new pro risk move.

Meanwhile, the economic data suggests that economic momentum has slowed in the developed world. But it remains robust. Earnings expectations have been revised sharply higher but, the results from the earnings season so far indicate that there is further scope for optimism both in Europe and the US.

The Fed: moving towards tapering, but no need to panic!

Investors have become less worried about inflation recently according to a survey by a leading analyst group. That’s odd because actual inflation readings have been rising in the US and elsewhere, and rising faster than expected. The US Federal Reserve (Fed) meet this week and although I do not expect anything dramatic to come out, it is clear that they are moving toward tapering, with a tentative plan to ease back on their bond buying program before year end. Yes, some of the bottleneck pressures like auto prices will start to ease soon but a second wave of inflation pressures from rent and wages will take their place – and these would be much more enduring. So, while there’s no need for the Fed to panic, the direction of policy will be clear.

Sterling and risk assets set to advance into August

A light touch on the monetary brake should not bother risk assets. As long as the global economic recovery continues, equities should benefit. The big threat remains a variant that escapes the vaccine, but it’s been a case of so far so good.

In recent weeks, we’ve been cautious on sterling and risk assets. I think there is a good chance that both advance as we head into August.

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