Over the past six months’ market participants have focused on the prospects of a return to normality and the associated reopening of economies that would accompany this. Our domestic predicament aside, with an increasing number of people inoculated worldwide, and travel restrictions being wound back across significant parts of the globe, it appears we may finally be getting to the point of this actually happening - London is currently playing host to Wimbledon and Japan appears ready to light the cauldron of the XXXII Olympiad.
In financial markets it’s often more important to be invested on the expectation of something and then move on if and when the expectation materialises. So if the global economy is officially back open for business (well, sort of), then what next? Batten down the hatches and turn to capital preservation mode? No, it’s still too early for this. However, we believe the potential upside for equity markets and pace at which they may climb from here should be limited.
As mentioned last month financial markets are still faced with the two ugly T’s. The first T has to do with inflation, or more specifically the transitory nature of it. The second T being the Federal Reserve (the Fed) tapering. Both now appear to be taking effect.
Transitory effects are kicking in and inflationary pressures are gradually abating. In some cases, the retrenchment of inflationary pressures has happened quite fast so the inflation pandemonium of the past few months has actually been more speculative than anything. Nonetheless, it has also transpired that there is, at least for the time being, some degree of stickiness in the inflation data.