Market Overview – 27/07/2021

Last Monday saw global equity markets suffer their worst day so far this year, followed by a sharp recovery over the following days that left the major US indices closing at fresh all-time highs on Friday. Confused?

Summer trading volumes are notoriously thin which can give rise to “air pockets” of volatility. Last weekend there were growing concerns about the spread of the Delta variant of Covid-19 and the potential impact on economic growth should it lead to renewed restrictions and lockdowns. This increasing nervousness saw some selling of equities, particularly the sectors sensitive to economic activity, and a switch into bonds. Yields fell as bond prices rose. Price moves were probably exaggerated by low summer trading volumes. This all makes perfect sense.

What is less easily explainable is why these equity moves were largely reversed within twenty four hours and share prices kept on rising through the balance of the week. One possible reason could be the belief that weaker economic growth resulting from another wave of the virus would reduce the likelihood of central banks, particularly the US Federal Reserve, of tightening policy earlier than expected. There is a strong view in some quarters that the monetary authorities may be wrong in assuming that recent spikes in inflation are only temporary and that they may have to raise interest rates sharply if higher inflation becomes embedded. Lower demand due to reimposed restrictions would probably temper some of the inflation threat.