Weekly market update: The Fed is not the answer to everything!

Mon 06 Sep 2021

Market Update

US, UK and European equities were relatively unchanged in Sterling terms last week, faring -0.1%, +0.1% and -0.1% respectively, amid concerns that the rate of global growth could start decelerating. Japanese equities were up +4.0% despite the resignation of Prime Minister Yoshihide Suga, while emerging market equities were up +2.7%, positive for a second week in a row after the Chinese tech sector had fallen significantly in previous weeks. Globally, stocks were up +0.3%, with energy and financials being the only sectors exhibiting losses. The US 10Y Treasury yield was down -1.5bps finishing the week at 1.322%. The German 10Y Bund yield was up +6.2bps amid higher than expected inflation in the euro area. Sterling was up +0.8% against the US Dollar and unchanged relative to the Euro. In US Dollar terms gold lost -0.1%, while oil prices rose slightly by +0.1%.

CIO Analysis

Last week, our central theme was the disconnect between the Fed’s bullish economic comment and its own, fairly dovish actions. We posited that actions speak louder than words and that the world’s de facto central bank was positioning for macroeconomic volatility. The data confirmed as much throughout the week: US payrolls came in at a third of expectations and PMI indices in China and India suggested manufacturing stagnation. Manufacturing reports suggest that export orders are losing momentum, potentially indicating industrial weakness for the west in the next few months. Payrolls continue to be affected by the advance of the Covid-19 Delta variant, which keeps many parents/income-earners in a fluid condition

Both the Fed and the ECB have been talking about tapering asset purchases. However, in this volatile environment it is difficult to see how central banks can reasonably justify the removal of accommodation. On the other hand, supply-driven inflation, a result of shortages and economic arrhythmia, could well continue to advance.

Despite the welcome accommodation, investors need to remain vigilant. There is a very thin line between monetary exuberance, driving equity and bond prices higher, and the markets realising that central banks can neither control supply-side inflation nor exit quantitative easing. When and if the latter happens, we could be looking at a paradigm shift.

In other words, it is conceivable that we are drawing closer to the end of a twelve-year course where the underlying tenet of every investor was ‘Simply don’t fight the Fed’. This tenet may well be replaced with ‘The Fed is not the solution to literally everything’, and a whole world of opportunities and risks opens up.  A paradigm shift would be volatile. It would allow the central banks’ political bosses less leeway to pander to the fringes and assign a greater impact and higher downside to their decisions.

However, we are not there just yet. Investors should remain diversified and patient with volatility. And portfolio managers must ensure that they are active enough to recognise opportunity and that there are more ‘bets’ in their clients’ portfolios than just equity ‘beta’.

-David Baker, CIO