Quarterly Investment Update

So far, so good. Vaccination rates continue to rise across the globe, equity markets are posting fresh record highs, and of course, monetary and fiscal policies remain ultra-loose. US Equities took the centre stage for yet another quarter, rising more than 8%, followed by European and Asian equities. Government bonds rallied as expectations for an(other) inflation overshoot eased, while the risk premium that investors demand to hold risky debt has fallen spectacularly to record, or multi-year lows. The current narrative in financial markets looks favourable for every asset class, as investors are discounting a very high degree of accommodation for years to come. Volatility is now at a post pandemic low, despite the fact that option markets indicate that investors are willing to pay extra for protection against a tail event.

On the one hand, the stock market looks to have priced in the perfect reopening, which would only be derailed by a persistent inflation overshoot. On the other hand, the fixed income market looks like it has never bought into this narrative and it is signalling that the ‘’return to normal’’ will be a long journey. Following a 9.7% annualized inflation rate over the three months ended in May, the US Central Bank looks to have managed to convince the market that inflation will be transitory, interest rates will increase only in a long while and just a little bit, economic growth will remain healthy, asset prices will rise moderately. Fed chair Jay Powell signalled that the committee will start talking about the pace of the asset purchases, while most officials now expect two interest rate rises in 2023 a year earlier than forecast just three months ago. The Fed’s dot plot also showed that 7 members see a hike in 2022, compared to just four in March. On the economic front, business spending and investment, manufacturing production, house prices, employment and consumer confidence all rose during the quarter.

It might seem that big surprises in the Old Continent happen only at the European football championships, but the economy didn’t fall short of surprises in Q2. Eurozone business activity expanded at the fastest rate for 15 years in June after lockdown measures were lifted, while recent high frequency data shows that consumers are flocking back to bars and restaurants, booking holidays at strong rates. Confidence among eurozone manufacturers rose to its highest level in 9 years. The recent rise in cases however is now prompting some countries like Spain and Portugal to rethink their total re-opening plans. Despite the clear improvement in economic conditions, the ECB signalled that it will maintain the pace of its bond purchases as there was ‘’ significant economic slack that will only be absorbed gradually over the projection horizon” and any tightening of monetary policy would be “premature” at this stage as it would threaten the recovery and the outlook for inflation.

The reopening of the hospitality sector drove a recovery in UK employment in Q2, with groups that had suffered the biggest job losses since the start of the pandemic experiencing the greatest rebound. However, an upswing in cases prompted Boris Johnson to delay the long-awaited end to Covid 19 restrictions. On the Brexit front, UK exports of food and drink to the EU dropped by almost half in the first three months of 2021 from a year earlier, in what trade groups said was a measure of the impact of post-Brexit trade barriers.

Sweden’s PMI fell to 66.4 in May, but despite the fall it is the fourth highest reading in the index’s history. Unemployment picked up to 9.8% in May from 9% a year earlier, while inflation picked up to 1.8%. On July 1, Sweden eased many of its restrictions aimed at slowing the spread of the COVID-19 pandemic, allowing for more visitors to stadiums and restaurants, the minister of health said.

Among others, inflation might be another ‘’thing’’ that is made in China. The price of goods leaving China’s factories has risen at its fastest pace since the financial crisis, piling pressure on policymakers as they grapple with the effects of a global commodity price rally. China’s producer price index added 9 per cent in May, after gaining 6.8% in April. While consumer price increases remain low in China, the country’s soaring producer prices are set to increase costs for businesses and exporters. As a result, industrial metals are in the spotlight after Chinese authorities made a pledge to release government reserves to tackle concerns over shortages and high prices.