Having progressed smoothly through the initial stages of the government’s roadmap in the lifting of covid restrictions, the delta variant has proven a roadblock delaying the final stage in lifting all restrictions. Whilst the delay was disappointing news to many, markets are forward-looking and as soon as data showing cases had started rising at a faster rate, and government officials began hinting in the media that it was a possibility, it was inevitable that the result would be a delay. It is a blow to many businesses, particularly those dealing in the hospitality and travel sectors, however, the UK stock market was unmoved following the announcement and remains the top-performing developed region this year so far for UK investors.
Although society and economies have not yet grown to ‘live’ with covid, investment markets appear to have reached that point, but any doubts over the efficacy of the vaccine would certainly be a worry. New variants pose a problem for markets, with the potential for one to prove vaccine-resistant potentially plunging the economy back into full lockdown. Unless this becomes a reality, markets will optimistically reflect an expectation that vaccines allow for a return to normal, albeit with the lifting of restrictions being temporarily delayed.
To raise or not to raise (interest rates)
We have written in recent months that the biggest cause for concern in investment markets is now inflation and the policies that may be put in place by central banks to control it. This remains the biggest worry for markets and June once again provided a moment where markets briefly sold off, before quickly recovering their lost ground.
The cause for volatility this month was the US Federal Open Market Committee’s statement regarding interest rates which showed the potential for more hawkish policy in the future and the possibility of an interest rate rise in 2022. In recovering from covid (in fact since the 2008 global financial crisis), rates have been lowered to encourage economic activity and boost growth. The record low rates we saw after the initial outbreak of the pandemic has been one of the key drivers of both the initial economic recovery, following the lockdown induced recession, and the recovery of many stock markets globally to recover past their pre-covid levels.
Governments and central banks want this economic growth to continue; investors want it as it will further support stock markets, however the by-product of this growth is potentially inflation which causes its own problems for economies. Central banks are therefore in the difficult position of wanting to encourage growth, while trying to limit inflation that has trended higher as economies recover from the depths of the pandemic. Interest rates remain at record lows, so a single increase in 2022 may not appear to be that impactful, but any increase will dampen future economic activity as the world recovers and moves on from covid.
Currency matters
After the initial outbreak of the pandemic and the resultant market falls, the flight to safety in the US dollar saw sterling fall to a low of $1.14 in March 2020. Since then, sterling has recovered strongly reaching a high of $1.43 following growing confidence in the UK economy as it recovers from lockdown and leaves behind some Brexit uncertainty. The more hawkish comments of the Federal Reserve in June resulted in a minor decline for sterling dipping back below $1.40 as the yields available on US dollar based investments became more attractive as a result.
The cryptocurrency market experienced yet more volatility in June with major falls across the market. Bitcoin, the largest crypto asset which went over $60,000 in April, saw its entire 2021 gains wiped out falling back below $30,000 for the first time since January. It continued a volatile time for the crypto market following threats of regulation from governments and central banks, concerns over the environmental impact of the mining process of the asset, and less than enthusiastic comments made by highly prominent advocates for crypto such as Elon Musk. The crypto market has regained some of its lost ground since but remains speculative at best.
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.