27 July 2021
Markets rally to escape the shadow of the Delta variant
Despite a shaky start to the week, markets bounced back and generally ended the week up.
Monday saw many markets suffer some of their worst days of the year so far – driven by fears over the Delta variant of COVID-19, and its impact on global recovery. The STOXX Europe 600 Index fell 2.3% on the day – its worst daily performance so far this year. The FTSE 100 fell by a similar amount, while American stocks in the S&P 500 Index dropped 1.6%. This drop was largely echoed in Asia the following day – the Nikkei 225, Shanghai Composite and Hong Kong’s Hang Seng index all closed down.
However, even in the wake of such weak performance, a number of commentators remained optimistic, saying they weren’t expecting it to signal the start of a wider market rout, such as the one seen in March 2020. Bethany Bekkett, Assistant Economist at Capital Economics, commented:
“The big picture is that we still expect US growth to be strong in absolute terms, and we forecast that global growth will remain above trend until end-2022. This underpins our view that, while we don’t expect big gains in risky assets from here, a major setback is unlikely.”
Despite their losses on Monday, western markets began their recovery the next day, going from strength to strength throughout the week. The S&P 500 Index is the perfect embodiment of this – it posted its biggest one-day drop since May on Monday, but this was followed by its biggest one-day gain since March the following day. By Friday, it was back to trading at record highs.
Markets were reassured by two events during the week. Firstly, there were reports on Thursday that Federal Reserve Chair Jerome Powell – who’s known for his relatively calm approach to increasing rates and tapering economic support measures – has strong support for another term in the role. Secondly, the European Central Bank’s decision to become more tolerant of inflation before raising interest rates, and to keep buying bonds. According to press reports, the decision was not unanimous, with German and Belgium bank heads objecting to some of the wording the ECB used. Nevertheless, the decision soothed markets, and helped European investors end the week on a strong note.
The ‘Pingdemic’ spreads
In our last newsletter, we wrote about the so-called ‘Pingdemic’ spreading across the UK, and it continued unabated last week, with the NHS Covid app advising 600,000 people to self-isolate during the week. This has led to worries that the high number of isolating workers could begin to have a negative effect on the UK economy.
The UK monthly Purchasing Managers’ Index, run by IHS Markit and The Chartered Institute of Procurement & Supply, for example, found private sector growth hit a four-month low earlier in July, largely due to staff and material shortages.
Chris Williamson, Chief Business Economist at IHS Markit, said:
“July saw the UK economy’s recent growth spurt stifled by the rising wave of virus infections, which subdued customer demand, disrupted supply chains and caused widespread staff shortages, and also cast a darkening shadow over the outlook.”
Despite these concerns, the FTSE 100 ended the week broadly flat, having also recuperated from its Monday falls.
Volatility on the horizon?
Last week’s turbulence has left analysts with questions about the future. Mark Holman, CEO, Portfolio Management, at Twenty Four Asset Management, for example, asked whether Monday’s experience suggests that markets will experience more market volatility in the near future, or if the recovery later in the week showed the level of investor willingness to deploy cash in every dip. He added:
“We think both forces will have a major part to play, but overall we will likely face at least a kink in the road on our journey to full economic recovery, and, in our opinion, that kink is now upon us.”
Of course, the best way to deal with uncertainty is to invest for the long-term with a well-diversified set of investments that can weather any ups and downs.