Jeff Lewis continues with his much anticipated series of commentaries on the economy.
The UK is set to abolish almost all of its Covid restrictions even as new cases soar – how might this end? The US Federal Reserve Chair addresses Congress in a week that sees key US inflation data, the European Central Bank will announce changes to its inflation target, and China cuts its key reserve ratio – another big week for markets.
With a vaccine roll-out that has seen double jabs for the overwhelming majority of people who are vulnerable to Covid either due to age or pre-existing medical conditions, the government have decided to ‘let it rip’ by abandoning almost all restrictions. This is despite a rapid rise in new cases due to the Delta variant and huge numbers of men crowding into pubs to watch the football – 30% more men than women tested positive in recent weeks. The vaccine has weakened the link from infection to hospitalisation and death. But it hasn’t severed it completely and both are set to rise rapidly.
The next few weeks may be a bit bumpy but the gamble might just pay off. In effect, the UK has decided to live with Covid, to have the rise in pressures on the National Health Service in the summer, when they are best able to cope. The rest of the developed world will probably follow. The US is nearly there already.
This means that global recovery, led by developed markets, should continue and the reflation trade remain intact. It’s a different story in emerging markets, but China has super-charged its vaccine roll-out and should be in the same position as the UK and US are now by year end.
Vaccines remain highly effective against the Delta and other variants. Even if a more dangerous variant does emerge, experts are confident that they can tweak their vaccines in just a few months. So, this is the new normal in the world of Covid. Just as we live with the flu, albeit more contagious and nastier.
Fed Chair Jerome Powell will testify to Congress in the characteristic cautious way. Explaining that inflationary pressures are transitory, and that the Fed will support economic recovery. Meanwhile, the European Central Bank will up its inflation target to 2% and above .
Investors have become used to companies heavily beating estimates. They no longer reward companies that do so with higher share prices. Of more interest will be corporate guidance. How long do companies expect production to be curtailed by a shortage of components like semiconductors. Are they able to recruit enough workers? Is inflation likely to persist and are margins under pressure?
With bond yields so low and economic recovery underway, risk assets still seem to be the place to be. We still think it’s too early over rely on emerging markets, but overall, modest outperformance by developed market equities looks likely to characterise the rest of the year. Hopefully the days of lockdown could well be over.
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