What has happened
Risk assets fell lower at the end of last week as concerns over the delta variant came at the same time as the Federal Reserve spoke about the prospect of tapering asset purchases. Several cyclical and several growth sectors underperformed over the week in a sign of a broad risk off environment. The all-important US 10-year Treasury yield took a round trip over the week but ultimately ended lower at 1.29%.
Delta Variant
The UK’s ‘Freedom Day’ was overshadowed by a sharp rise in cases and the self-isolation of the Prime Minister and Chancellor. The UK’s weekly growth rate remains high and there is much debate as to whether the government should have delayed the reopening again. Those in favour point to relatively high vaccination rates and the need to open during the summer to avoid overwhelming the NHS during flu season, those against point to the risk of hospitalisations and the risk of new variants. Regardless of which side of the debate one is on, global policymakers will be watching closely ahead of their own reopenings. Ahead of Friday’s start to the Olympics, officials are struggling to contain cases within athletes and support staff, and Sydney has tightened restrictions further to try to get the delta variant under control.
ECB
The Federal Reserve has now entered its communication blackout window so there will be silence on US central bank policy ahead of the next meeting on 27th-28th July. In the interim we hear from the ECB in their first meeting since the conclusion of the Strategy Review. The Strategy Review effectively made the bank’s 2% inflation target symmetric, which means that if inflation has undershot for some time the bank will allow it to overshoot. This mirrors the stance from the Federal Reserve after last year’s Jackson Hole symposium. With the new strategy this will be an important meeting for the ECB and is expected to, at the very least, lead to a change in the forward guidance from the central bank and communications looking forward.
What do we think
The move lower in US 10-year Treasury yields last week does not merely represent falling inflation expectations due to the success of the transitory inflation narrative, but also growing concern over the delta variant and the possibility of COVID pushing further into 2022. At the start of the year, with the vaccine rollout beginning, there was hope that developed economies would move ‘post-COVID’ by the end of the year, the delta variant has made investors question this and with it growth expectations for the year ahead.
| Index | 1 Day | 1 Week | 1 Month | YTD | |
| TR | TR | TR | TR | ||
| MSCI AC World GBP | -0.3% | 0.0% | 2.3% | 11.4% | |
| MSCI UK All Cap GBP | -0.2% | -1.4% | 0.4% | 11.4% | |
| MSCI USA GBP | -0.3% | -0.5% | 4.1% | 14.4% | |
| MSCI EMU GBP | 0.0% | -0.7% | -0.6% | 10.3% | |
| MSCI AC Asia ex Japan GBP | -0.3% | 2.6% | -0.9% | 3.1% | |
| MSCI Japan GBP | -0.2% | 1.5% | -0.4% | 0.6% | |
| MSCI Emerging Markets GBP | -0.3% | 2.3% | -0.9% | 4.1% | |
| MSCI AC World IT GBP | -0.7% | 0.0% | 4.5% | 12.7% | |
| MSCI AC World Healthcare GBP | 0.6% | 0.6% | 3.2% | 10.3% | |
| Barclays Sterling Gilts GBP | 0.5% | 0.7% | 1.3% | -4.5% | |
| Barclays Sterling Corps GBP | 0.3% | 0.4% | 1.1% | -1.9% | |
| WTI Oil GBP | 0.6% | -3.1% | 0.5% | 46.6% | |
| Dollar per Sterling | -0.4% | -1.0% | -0.3% | 0.7% | |
| Euro per Sterling | -0.4% | -0.4% | 0.2% | 4.2% | |
| MSCI PIMFA Income | 0.0% | -0.4% | 1.1% | 6.3% | |
| MSCI PIMFA Balanced | 0.0% | -0.4% | 1.3% | 7.4% | |
| MSCI PIMFA Growth | 0.0% | -0.6% | 1.4% | 9.3% | |
Source: Bloomberg as at 19/07/2021. TR denotes Net Total Return
