International Communique No. 299 – 6th July 2021


According to NASA, one of the main dangers involved in space travel is the lack of gravity, which is precisely what seems to be currently affecting financial markets. Leading equity indices continue to soar to new highs while bonds seem impervious to inflation fears, with long-term yields tumbling from their March peak. Many would point to the ultra-loose monetary policies and splurges of fiscal stimulus as the reason. Yet the pace of growth could slow in the second half of the year as economies lose the impetus from the easing of lockdown measures and the dollars distributed to US households dry up. But does that mean that stock valuations will come back down to earth? Reported results, especially guidance numbers, will tell us more in due course.

US equities started July on a high note last week, with the S&P 500 putting on 1.7% on the back of strong gains from tech and pharma blue chips. Contrarily, main European indices corrected moderately. US job creation was better than expected, clocking at 850,000 in June and soaring past the 706,000 estimated – a sign of how strong the economic recovery has been. A large proportion of the jobs were created in the services sector, in catering, hotels and retail. However, many Americans are reluctant to return to work, either for fear of the virus or because unemployment benefits have been so generous. Unfilled job openings are currently estimated to exceed 9 million, which is almost equal to the number of people registered out of work. In this respect, the Fed has been clever in shifting its focus from inflation, which has been gathering pace, to the pre-covid levels of employment, which are still miles away. Back in March, many analysts saw the ten-year yield at around 2%. Purchases by
pension funds, unsettled by the lofty equity valuations, and foreigner investors looking for yield have compressed this to 1.43%.

The International Monetary Fund has sharply raised its growth forecast for the US and now foresees 7% in 2021 (up from 4.6% projected last April) and 4.9% in 2022. But this depends on the current budget plans, the infrastructure spending plan, the family support plan and the tax reform all making it over the finish line which may be easier said than done.

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