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Another hesitant week for financial markets

Key takeaways

In another lacklustre week for financial markets, inflation remained a hot topic, and there were signs that divergent vaccine rollouts globally could be creating varied economic growth journeys.

  • The Delta variant of the COVID-19 virus continues to impact economic activity, particularly in the US and China. However, despite the ongoing challenges of the Delta variant, the overall message on the global pandemic remains one of optimism. In the UK, the efficacy of vaccines continue to lessen the link between new cases of the virus and resultant deaths, while across Europe vaccination programmes are gaining momentum.
  • Among developed world nations, the US remains the only real disappointment when it comes to vaccine rollouts, with momentum stalling in younger cohorts and in key states. Among other large nations, China claims to have fully vaccinated 1 billion people (70% of population), but the efficacy of its vaccine of choice – Sinopharm – has proven questionable. Overall, though, vaccines remain the route to normality and should cushion a winter ‘wave’ of the virus, while softening restrictions in the global economy relative to previous waves.
  • Meanwhile, growth in China appears to be slowing again, on the heels of an initial sharp recovery. This is likely to have a knock-on effect for global economic growth over the next 6-12 months. For now, absolute global growth numbers remain solid, but there is increasing evidence that we are moving to a stage in the global cycle where economic activity (and returns from financial markets) are more muted.
  • Inflation remains in the headlines. The latest inflation data from the US (CPI) shows slowing momentum over recent months, supporting the theory that higher US inflation will prove transitory. Riskier asset types (like shares) would benefit from further progress and evidence that inflationary pressures falling back.
  • In the UK, though, inflation continues to grind higher. In UK inflation data, greater account is given to energy costs (which are currently very high), and the anniversary of the ‘Eat Out to Help Out’ scheme (which heavily discounted prices a year ago) is also pushing year-on-year figures upwards. Nevertheless, we continue to believe that UK inflation will prove transitory too, and the Bank of England appears to agree. When the Bank does eventually raise interest rates, it is likely to do so only gradually.

Weekly market moves

  • It was another soft week for global stock markets. Japan (a laggard for much of this year) was once again the only major market to deliver positive performance.

  • Traditional ‘safe-haven’ assets, such as precious metals and government bonds, didn’t fare much better.

  • Oil and key currencies such as the yen and dollar were the main beneficiaries in sterling terms.

What to look out for this week

  • This week, the US Federal Reserve meeting is expected to offer more direction on its timeline for tapering its asset purchase programme. Quarterly growth, interest rates, inflation and unemployment projections will also be discussed.

  • On Thursday, the Monetary Policy Committee at the Bank of England will be discussing the current bank rate, although no changes are anticipated.

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