Markets no longer fear inflation, stocks will continue to recover

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A trader works behind plexiglass on the floor of the New York Stock Exchange (NYSE) in New York City, New York, USA, 28 July 2021.

Andrew Kelly | Reuters

LONDON – The markets no longer fear inflation and, according to HSBC Wealth Management, are now concentrating on the spread of the Delta Covid 19 variant.

In a statement Thursday, Chief Investment Officer Xian Chan said markets are turning to the concept after a period of concern over persistently higher inflation as investors are assessing whether the US Federal Reserve may be forced to tighten monetary policy got used to.

Xian noted that US consumer price inflation remained high at 5.4% annually in July, but 10-year US Treasury yields fell, suggesting that inflation markets “have nothing to fear except to fear oneself ”.

“There is usually a direct correlation between bond yields and inflation expectations. When higher inflation is expected, bond yields rise to reflect the likelihood of higher interest rates. But interestingly, bond yields fell from their April high, ”said Chan.

In Europe, 10-year government bond yields fell again to 1.3405% on Friday morning after hitting 1.7% in March. HSBC predicts that it will drop to just 1% by the end of the year.

Meanwhile, the S&P 500 hit a new record high on Thursday, and Xian stressed that these market moves are happening despite continued inflation expectations.

The Philadelphia Fed’s ongoing poll of forecasters shows that consensus expectations are for an inflation rate of 2.4% over the next five years.

“Even when analyzing stock market volatility, on closer inspection, the S&P 500 has risen month-to-month since January despite inflation concerns. Even in May and June, when inflation fears were greatest, they delivered positive returns, ”he said, adding that all of this indicates that financial markets are no longer afraid of higher inflation.

Xian noted that this does not necessarily mean that investors will not be “scared” when communicating about the Fed’s intentions to curb its quantitative easing program, but said the Fed has been “pretty good” with its cut communication so far. managed.

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“The markets are now concentrating more on the state of affairs with regard to Covid and in particular on the spread of the Delta variant,” he said.

The number of Covid cases is rising again in various parts of the world, with several countries, particularly in the Asia-Pacific region, re-introducing containment measures in recent weeks. Meanwhile, Britain and others have pushed ahead with reopening their economies.

“But regardless of where you look, the general view (and hope) is the widespread success of vaccination programs will allow the recovery story to continue in H2 this year,” Xian said.

With this baseline scenario, HSBC is still investing in stocks, especially sectors that are directly consumer-facing such as consumer discretionary, financials and real estate. However, he cautioned investors that volatility can still occur on a regular basis.

However, when it comes to the outlook for the second quarter, the strategists of the big banks are divided. Sebastian Raedler, Head of European Equity Strategy at Bank of America, told CNBC Pro Talks earlier this week that as growth slows, the reopening boom fades, and stimulus from governments and central banks wanes, so will stock markets.

“We believe that by the end of the second quarter we saw the apex of the global cycle and the euro area cycle very clearly and, to put it simply, if you slow down now instead of speeding up you are really starting to be the key catalyst for this fantastic stock market performance that you’ve seen in the past 15 months, “said Raedler.