Market Commentary – June 2021

UK inflation exceeds 2% target – a sign of recovery?

The strength of the economic recovery as the UK emerges from lockdown has seen inflation rise to 2.1%, the highest it’s been in two years, and hitting and exceeding the target of 2% set by the Bank of England (BoE). However, the BoE has suggested that any peak, which could rise to well above 3%, would be temporary in nature, caused by artificially low prices during lockdown in 2020 and the imbalances of various supply and demand dynamics across the sectors. Not least, the supply bottlenecks experienced due to Brexit and the rise in energy prices.

BoE expects demand and supply to balance

In the minutes of the BoE Monetary Policy Committee Meeting, held on the 24th June it’s stated, the rise of inflation is “expected to be a temporary period of excess demand”. In the medium-term, 2% is projected to be the resting place for inflation, and although the rise in inflation would usually be a cause for concern, the BoE governor, Andrew Bailey, has “warned against an overreaction”. The BoE therefore maintains the temporary rise in inflation is a feature of the process of ‘bouncing back’, with no move to undermine this by tightening monetary restrictions at present.

Bank rates remain on hold

In the vein of keeping things on an even, anti-reactionary keel, the BoE’s Monetary Policy Committee kept bank interest rates on hold at 0.1%, maintaining bond buying at the current level. The vote was nearly unanimous with only one of the nine committee members voting to reduce the bank’s bond purchases.

Unemployment and consumer confidence still to recover

As unemployment remains low with sufficient slack in the labour market, and the unwinding of the furlough scheme commences, predicted to hit jobs via increasing redundancies, inflation is unlikely to spread to upward wage demands. 

Despite the rise in inflation, and reports of a recovering economy, although to some extent true in areas, consumer confidence and consumer spending remain key factors and, for now, they remain far below pre-pandemic levels.

US Federal Reserve hold off on rising inflation

Within the US, inflation is at 5%, the highest it’s been since 2008. Despite murmurings of potential increases in interest rates, there has been no action taken. The Fed have decided to leave interest rates and its asset purchase programme unchanged. The US Fed have been, and continue to be, consistent in their hands-off approach, pending full confidence of the job market. Although, there is an expectation for two rate increases in 2023. 

In other US news, following the Fed’s meeting, government bonds fell, causing yields to rise, as well as US equity markets, while the dollar appreciated strongly.

US tax deal at G7 no threat to share prices

The US held a paramount position within the recent G7 meetings, with one of the areas of discussion being a tax deal aimed at ending the practice of sending earnings offshore to a jurisdiction with a lower tax rate, forcing companies to pay tax in the countries where they make their sales. 

Despite some dissent, the share prices for major companies, such as Amazon and Apple, have remained stable, revealing that investors don’t consider the deal any detriment just yet.

US recovery lacks turbo-charge

High levels of economic uncertainty in the US , including the rising inflation, but also slow jobs growth, have hampered Joe Biden’s ambitious spending plan, which has now taken a back seat, and certainly now not the ‘turbo-charged recovery’ predicted during post-COVID euphoria. 

Europe inflation rises above ECB target

In May, Europe’s inflation rate rose to 2% as consumer spend resumed, pushing up prices, surpassing European Central Bank’s (ECB) target for the first time since 2018. Similar to the situation in the UK and US, ECB policymakers, including ECB president Christine Lagarde, have interpreted the increase as temporary, driven by the effects of a successful rollout of vaccinations and easing of restrictions. And also, have left the ECB interest rates unchanged, promising to maintain its bond buying programme.

Global recovery boosts oil prices

Analysts from Bank of America have forecast oil to be trading above $100 a barrel next year as the world recovers from the pandemic and travel demand increases. Recently, Brent crude oil pushed above $75 a barrel for the first time in two years, with supply restricted and demand continually increasing as the global economic recovery continues; a significant increase from a year ago when a barrel traded at $40. 

Number of IPOs continue to surge in 2021

The amount of money raised through Initial Public Offerings (IPO), or private companies going public, by offering shares on the stock exchange, in the US has already exceeded the previous record for an entire year. New listings in the UK have lagged the US slightly; but 2020 saw the largest number of IPOs in a decade and 2021 is following suit.

Asset ClassProxy1-Month3-Month6-Month1-Year
CashUT Cash/Money Market00.00%00.00%00.00%00.07%
Gilts FTSE Gilts All Stocks01.27%01.19%-05.67%-06.24%
UK Corporate BondsUT UK Fixed Interest00.78%02.44%-04.13%-05.26%
UK EquityUT UK Equities-00.68%06.58%14.44%34.69%
European EquitiesMSCI Europe ex UK00.49%07.15%10.41%21.79%
US EquitiesS&P 50004.99%07.22%13.79%25.34%
Japanese EquitiesMSCI Japan02.15%-00.43%00.22%11.66%
Emerging Markets EquitiesMSCI Emerging Markets01.66%03.61%06.28%26.03%
PropertyUT Property02.17%07.63%11.34%17.42%

Data Sourced from FE Analytics, and Bloomberg Finance LP.

*The value of your investment can go up as well as down, you may get back less than you originally invested. Circumstances are subject to change. Performance from the past or yields quoted should not be considered as reliable indicators of returns. This communication is for general information only and is not intended to be individual advice