“There is now a feeling that the UK could be staring at a fresh Autumn lockdown,” says Susannah Streeter of Hargreaves Lansdown. “Far from giving investors a jolt of confidence, Freedom Day has seen it evaporate, as sharply rising infection rates disrupt businesses.”
The pandemic strikes again
The pan-European Stoxx 600 had its worst day of the year so far. America’s S&P 500 retreated by 1.6%. The US ten-year Treasury bond yield fell to 1.18% as prices rose, the lowest level in five months. Japan’s Nikkei 225 index hit a six-month low on Tuesday.
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The message from bond markets seems clear, says John Authers on Bloomberg. “Forget about the inflation scare” and “abandon hopes for a strong reopening and economic recovery”. That might seem surprising given recent inflation data, but the Delta variant is driving an enormous surge of cases in the UK.
Only high vaccination rates are preventing another devastating wave of hospitalisations. That bodes ill for places with low vaccination rates, not least parts of the US. The spread of the Delta variant is an especially urgent worry in emerging markets, says William Jackson of Capital Economics. Asia is currently in the eye of the storm. Low vaccination rates mean “much of Latin America” and “other parts of Asia and Africa” look vulnerable, which will slow down their recoveries.
Markets pause for breath
The FTSE’s wobble is a reminder that “escape from an unfree, restricted economy is likely to be a messy affair”, says Nils Pratley in The Guardian. The “pingdemic” is hitting everything from pubs to factories. We still don’t know for sure whether “the lifting of most coronavirus restrictions really will be ‘irreversible’”. As Deutsche Bank puts it, this is all something of an “experiment”. While we wait to see the results, expect “a volatile summer for stockmarkets”. Don’t panic – markets are just entering the “mid-cycle”, says Andrew Sheets of Morgan Stanley. After a very strong recovery over the last 16 months it was inevitable that things would cool down at some point. Never mind the growth worries, “we think that the global recovery will keep pushing on”.
“The easy money has been made in this market,” says Nicholas Jasinski in Barron’s. Wall Street’s favourite “buzzy phrase” right now is “peak growth”. The idea is that growth in “corporate earnings, US gross domestic product, stock prices… and inflation” have all peaked for the cycle.
While the first stage of the post-pandemic rebound lifted all boats, investors must now be more discriminating. They will look for stocks that can “stand the negative impacts of hot inflation and shifting monetary policy”. The answer? Big Tech, out of favour for much of this year, could soon be back in vogue.
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