Markets in general have been relatively subdued over the past month, with the main equity indices either side of the Atlantic grinding slowly higher, as the VIX (S&P 500 volatility) index recently saw 15-month lows at an intra-day print last week of $15.15.
This gentle trade higher for risk assets comes after the temporary pullback that we saw during the first half of May, led by the stronger than expected CPI inflation result in the United States. This 4.2% year on year reading far exceeded analysts’ expectations for 3.6%, bringing the figure to a 13-year high and subsequently sparking fears that the Federal Reserve may be forced to step in at some point in the future and adjust its highly accommodative monetary policy. Market fears however have since been relieved by central bank officials coming out in force to reassure investors that these inflation spikes are being driven by short-term factors as economies reopen, a view that we currently tend to agree with. Price action in the bond market as well as future inflation expectations are lending support to this view as well. We will continue to monitor economic data and see how it plays out in the next few weeks and months.
A number of themes dominated the economy and financial markets throughout the month of May and into the beginning of June – namely inflation, robust corporate earnings, Environmental, Social and Governance (ESG) factors, upgraded economic forecasts from the OECD and the European Commission, and cryptocurrency volatility. Geopolitical risks were also somewhat elevated over the past month or so, with conflict between Israel and Palestinians in the Gaza strip, a cyber-attack against a major US pipeline and the forced grounding of a Ryanair flight in Belarus. As we head for the mid-year mark, we remain positive on the outlook for risk assets which continue to be supported by ongoing accommodative monetary and fiscal policy, the tailwind of strong earnings and a rebound in economic activity as a result of increased vaccine rollouts.
In the first 5 ½ months of this year, we have seen the successful rollout of an unprecedented vaccine programme, albeit with varying degrees of speed and efficiency. Nevertheless, significant progress is being made and there are now significant grounds for optimism, notwithstanding the by now normal caveats about epidemiological developments, particularly the path of viral variants. To date, the good news is that the efficacy of the various vaccines is very impressive, and in recent weeks, the scientific indications in relation to the efficacy of the vaccines in the face of the new Indian ‘delta’ variant give cause for great hope. The simple equation is that as the vaccine programme gets rolled out, death levels and hospitalisations are declining in most countries and economic activity is picking up again. There is now, with solid justification, a high level of confidence about the scope for a strong rebound in global economic activity over the coming months and then in to 2022.
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