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Investors have started the week on the back foot, with last Friday’s fall on Wall Street - its worst in a month - spilling over into Asia and Europe today.
Investors are focused on the twin concerns of growth and inflation, with rising infections and higher prices, raising questions about the sustainability of the stock market at today’s levels.
In particular, the spread of the Delta variant in countries with a poor vaccination record has seen an alarming rise in Covid-related deaths.
That provides an unwelcome backdrop to the UK’s so-called Freedom Day today, with remaining legal restrictions being lifted in the face of growing evidence that the battle against Covid is far from over.
Meanwhile, big rises in the inflation data on both sides of the Atlantic last week have focused attention on whether price rises are transitory or the start of something more worrying. US inflation has hit 5.4% year on year while in the UK it stands at 2.5%, its highest for three years.
So, what do investors need to know as the week gets underway:
1. Stock markets have started the week lower, picking up on last Friday’s 0.75% fall on Wall Street. European shares fell by 1.7%, with the FTSE 100 a little worse, down 1.9%. That followed declines of 1.3% in Tokyo and 1.7% in Hong Kong.
2. Bond yields have fallen back again. The US 10-year Treasury bond yield dipped to 1.25%, well down on its high in March of 1.75%, as investors decided growth was a bigger concern than inflation. Fixed income investors are buying into the Federal Reserve’s narrative that inflation is a transitory phenomenon that will pass once the year on year comparisons with the worst of the pandemic wash through the system.
3. The high level of the stock market looks increasingly odd as a growing number of companies fail to hold onto recent gains. Just 30% of S&P 500 constituents are currently trading above their 50-day average. Historically this narrowing of the market has preceded a market correction.
4. However, earnings season has got off to a good start. Although only 40 or so companies among America’s top 500 have reported their April to June earnings, the current rate of profits growth stands at 71%. Although this reflects favourable annual comparisons, it points to a full year growth rate of 37%.
5. Attention shifts this week from the banks, which gave earnings season a strong start last week, to tech with a handful of results in the sector providing an insight into whether this remains the market’s most resilient and defensive corner. Twitter, Netflix, Intel, IBM and Snap are all due to announce numbers this week.
6. The oil price is in focus, with a weekend deal between OPEC and its allies promising a rise in output designed to put a lid on the soaring cost of crude. Oil fell back to around $71 a barrel today after hitting a recent high of $74. The end of 2022 has been pencilled in as the date by which output should return to pre-pandemic levels.
7. The ECB is the central bank in the spotlight this week, with its rate-setting meeting concluding on Thursday. Two weeks ago, the European Central Bank agreed to let inflation run a little above the 2% target, mirroring the Fed’s approach. However, for now no change is expected in the ECB’s lower for longer approach to interest rates. The main refinancing rate should remain at zero with the deposit facility rate also unchanged at minus 0.5%.
8. Meanwhile, the risk-off mood has given a boost to the US dollar, a traditional safe haven. The dollar index, which measures the currency against its main rivals is 0.3% higher. Against the pound, the dollar trades at $1.37.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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