International Communique No. 293 – 26th May 2021


Although inflation is not at a worrying level, the debate over its potential consequences continues to unsettle the markets. Fears are mainly focusing on a possible adjustment to the Federal Reserve’s monetary policy, entailing a reduction in the pace of its asset purchases in the latter half of 2021 if the upward movement in prices proves heftier and longer-lasting than expected. Concern has been fuelled by America’s ISM manufacturing index, currently at its highest level since 2008. Even so, it is the course of job creation, still far below its pre-pandemic level, that will determine whether or not the US central bank raises interest rates.

Stock markets have undoubtedly priced in a lot of good news including excellent company results. This explains the greater caution shown by investors and the lackluster performances of benchmarks. The US market has edged up lately on the back of weekly jobless claims, which have fallen to their lowest level since the Covid crisis began. Cyclical stocks have largely trended downwards while pharma and the big tech stocks have held the market up. The major equity benchmarks have reflected a resurgence in the popularity of top-quality companies, i.e. those that can boast strong earnings.

The sanguine attitude to inflation voiced by some Federal Open Market Committee members and the steady roll-out of vaccination programmes together point to a significant economic recovery. On the macro front, however, Germany’s Quarter1 2021 GDP was off slightly at -3.1% year on year, dragged down by a large drop in the consumption component.

The Chinese authorities aim to to curb the jump in commodity prices, especially in the metals segment, which are driving up production costs. Beijing says it will not tolerate speculation, and the same holds for cryptocurrencies. Financial institutions will be barred from offering services in this area and regulation of the “mining” and trading of bitcoins will be beefed up.

China’s announcements followed the about-face a few days earlier by Elon Musk, who declared that Tesla would no longer accept payment for its vehicles in bitcoin. The moves combined to unleash a wave of panic that sent many cryptocurrencies plummeting, proof that they are highly speculative investments. Moreover, to strengthen tax compliance, the US also wants holdings in cryptocurrencies exceeding USD 10,000 to be declared to the Internal Revenue Service. In view of the uncertain economic and financial outlook, gold has performed well, in line with its role as a hedge and diversification tool.

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