Rising Covid Cases Cause Markets To Reassess Growth:
Last week saw markets decide that rising Covid cases were a real concern. On Monday many global equity markets fell 2 per cent or more. And, government bond yields falling to levels last seen in early February. However, some good earnings updates made these concerns short-lived. Notably bond yields have been slower to recover. This suggests lingering nervousness about the longevity of the current recovery.
Rapidly rising infections continue to cause severe problems, even in countries with successful vaccination programmes. As the UK is demonstrating, even if the link between infection and serious illness has substantially weakened the huge numbers off work is highly disruptive. Elsewhere, the UK government has decided that the Covid crisis is not sufficiently taxing. So, it has reopened hostilities with the EU by threatening to suspend the new rules for trade with Northern Ireland. Despite the government’s intentions, both problems appear to be complicated. They also seem impossible to win and will do more damage the longer they go on.
Rising Covid Infections Spark Market Volatility
The rapid rise of coronavirus cases around the world caused a sharp sell-off in global equity markets last week. UK, European and Japanese stock all fell more than 2 per cent. It came as the rise in cases in unvaccinated countries, as well as the rapid rise in many countries with established vaccination programmes, such as the UK and US, raised concerns about the strength of economic growth. The sell-off was accompanied by a rally in government bonds. The yields on 10-year UK gilts dropped to their lowest level since February this year.
Stock markets have generally recovered quickly. No doubt, they have been helped by a succession of strong earnings reports. So, many global indices were back to where they began the week. As well as the rapid changes in markets, last week saw a noticeable reversal of previous trends. Growth stocks, such as large tech companies, have strongly outperformed and led the recovery. Meanwhile value and cyclical stocks have struggled.
‘Pingdemic’ Risks Undermining Economic Growth
Last week started with the removal of most remaining coronavirus restrictions in England. ‘Freedom day’ was intended to mark the return to life pre-pandemic and assist economic recovery. However, there has been a surge in new infections. Subsequently, a record number of people have been told to self-isolate after being contacted by the NHS Test and Trace. The knock-on effect has led to reports of shortages at supermarkets. Also, shifts are being cancelled at manufacturing plants due to shortages of available staff.
The disruption caused by staff shortages has led to a deterioration in expected economic activity. The monthly Purchasing Managers Index shows business confidence remains positive but has dropped sharply since last month. In contrast, the PMI reading for the EU remains at record high levels. The rise in infections and the number of people isolating has also been accompanied by a slowdown in retail sales, with the latest data from the Bank of England showing that spending on debit and credit cards remains around 5 per cent below pre-pandemic levels.