Market Overview – 18/08/2021

A lot of the market narrative over the past few months has centred around the success of the Covid-19 vaccines and the gradual unlocking of the global economy. These factors, while very welcome, have also fed into concerns about supply constraints and a sharp rise in inflation which in turn could lead to central banks reversing their dovish monetary policy. Over the last week or so, we have begun to see that narrative shift slightly as the Delta variant spreads rapidly around the world. Hospitalisations remain mercifully fairly low in countries like the UK, but there is no doubt that some of the economic optimism experienced this year has begun to fade. The vaccines are working but there is a long way to go before we can put the pandemic behind us.

These developments have not been lost on the bond market and we have seen a sharp fall in government bond yields over the last couple of weeks. This makes sense because a slower recovery makes it less likely that the Fed will need to change tack although the speed of the move in US Treasury markets – with ten year yields now below 1.4% – has probably been exacerbated by technical factors such as a shortage of new issuance. Lower bond yields are not necessarily bad news at all for equity markets and they generally held up quite well last week in the face of the worsening Covid-19 news. However, there was some rotation between the surface with value sectors lagging growth.

Looking ahead this week, there is quite a lot of key data out, including inflation readings in the US and the UK. Recent Chinese data has also been a bit soft of late, prompting the central bank to cut the reserve requirement for banks on Friday, Q2 Chinese GDP numbers will be closely watched