International Communique No. 300 – 13th July 2021


Air currents have suddenly started blowing through markets, taking wind from the sails of the reflation trade to power ahead positions banking on a sharp slowdown in the global economy. This has been based on the assumption that the pace of growth has peaked as the effects of fiscal and monetary stimulus rapidly fizzle out. For proof, simply witness the buying frenzy surrounding US Treasury bonds, including the covering of short positions, which has depressed the 10-year yield below 1.3%. Published minutes from the latest US Fed meeting, outlining the first steps to reduce securities purchases, at first fuelled fears of tapering until the Atlanta Fed president spoke out to calm investors, saying that this would be very gradual. The spread of the Delta variant, with the prospect of others emerging, has furthermore rekindled the possibility of further restrictions being placed on economic activity.

Key indices were hit by marked correction last Thursday, with financial stocks taking a particularly hard bashing. Recovering on Friday, the S&P 500 and Nasdaq soared to set new records, buoyed by the upswing in growth stocks and raising the question as to whether this marks a new move of sector rotation, as cyclicals and value stocks are dumped in favour of tech and defensives. Some view that these sudden gyrations are overdone and diversification remains the maxim.

Important for inflation expectations, the US consumer price index for June will be released tomorrow with many speculating it to be 4.9%. Reporting season for major banks JP Morgan Chase, Goldman Sachs, Citigroup and Bank of America are also kicking off this week. Expectations are lofty for the second quarter of 2021 after the soft patch in the same quarter last year.

Speaking after the G20 summit, the President of the European Central Bank Christine Lagarde stoked renewed expectations regarding the content of the monetary stimulus to be revealed at the ECB meeting on 22 July. The current bond-buying scheme amounting to EUR 1.85 billion should set to run until at least the end of March 2022. For providing continued support to the Eurozone economy, this will be followed by a transition to another form, details of which will be revealed later.

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