20 July 2021
As worries about the Delta variant of COVID-19 persisted last week, along with doubts about the potential pace of recovery, so did the market growth slowdown that’s been seen in recent weeks.
This has also been compounded by the continued high rates of inflation in the UK and the US – in America, Federal Reserve Chairman Jerome Powell sought to calm markets on Wednesday by repeating the message he gave after the last inflation figures: that temporary factors are causing the recent surge in inflation, and that conditions have some way to go before the Fed will change its policies in response.
However, pressure is mounting on central banks to prove they are not being overly relaxed about inflation, with Gordon Shannon, partner at TwentyFour, noting:
“While the Bank of England [BoE] continues to espouse their view that this inflation is transitory, we believe its magnitude and timing may introduce some doubt: 2.5% is yet again a breach of their stated 2% target.
“Furthermore, that above-target inflation is occurring relatively quickly in the UK’s recovery (we have only just reached the 19 July ‘Freedom Day’) appears to dramatically increase the chances that the economy will breach the key 3% CPI level. When the BoE misses their inflation target by more than 1%, it must formally explain the cause to the Government.”
It wasn’t just the threat of inflation affecting the market growth last week – resurging COVID-19 numbers, primarily the Delta variant, have also helped to reverse some of the recent growth markets had been seeing. In the UK, where over 87% of adults have received their first dose of the vaccine, and 67% have had a second dose, almost 50,000 were testing positive daily by the end of the week – levels similar to those we were seeing at the beginning of the year.
And these figures are likely to rise, too. The Euro 2020 Final on 11 July prompted large gatherings across the UK just over a week before final national restrictions were due to be lifted.
Case by case
Other countries, while reporting lower figures, are also finding their case numbers rising. In the US, where approximately 68% of adults have received at least one vaccination, it is reported that cases have doubled since the start of July, although their numbers remain in the 30,000s. France, Germany and other major European countries are also reporting increasing numbers – but, again, from much lower bases.
It is worth noting that hospitalisation rates and deaths are much lower than their previous peaks, and recent COVID-19 cases are primarily being seen among the young. This has, however, caused economic difficulties for many businesses due to the large number of people needing to self-isolate as a result of contact with someone with the virus – in the UK, many have termed it the ‘pingdemic’.
With these pressures leading to market fears around reopening schedules being delayed and stunting recovery pace, the FTSE ended the week down 1.60% after peaking on Tuesday morning. The STOXX Europe 600 then fell 1% on Thursday and continued to fall on Friday, finishing slightly down overall. The US also saw its markets fall slightly, with the Nasdaq and S&P 500 both dropping less than 1%.
Some sectors were affected more than others by the rise in COVID-19 numbers; the STOXX travel sector was the worst-performing sector in the index, while energy stocks also recorded above-average falls.
Adrian Frost, manager of Artemis’s UK equity income strategies, noted:
“When COVID’s variants resume, investors tend to bail out of ‘value’ stocks, including reopening and reflation trades, and pile instead into a handful of ‘growth’ stocks. When the pandemic seems to be abating, they do the opposite. Last week, markets were worried about Delta Plus and a weaker economy. So, bond yields fell, and growth was in fashion. Then on Friday, bond yields rose, and value was back.”
It is important to remember that a number of markets, such as the S&P 500, Nasdaq and STOXX Europe 60, all remain close to the historic highs previously recorded.
The Chinese economy reported GDP growth of 7.9% compared to the year earlier – although this was slower than the 18.3% year-on-year growth of the prior quarter, the difference was more attributable to the timing of the pandemic last year.