Last week was a tough week for equity markets, the S&P 500 Index in the US fell -1.9% while the FTSE 100 in the UK fell -1.6%.  All of this stemmed from a change of tone from the Federal Reserve, with Chairman Jerome Powell coming out with a statement which was far more hawkish than the market anticipated.  Stating that inflationary fears may require an increase in interest rates far sooner than had previously been indicated sent markets into a downward spiral.  In the currency markets this had the unsurprising effect of driving the dollar higher, and sterling retraced over -2%.

However, other reactions in the market might not seem so intuitive. Within the bond market, looking at the yield on the US 10 Year treasuries, they contracted from around the 1.6% to 1.4% level. The bond market telling us that it does not believe that inflation will be a problem, or that what we are experiencing is transitory as we move out of the COVID-19 crisis.

Within equity markets there did not appear to be outright selling taking place, (according to analysis conducted by Morgan Stanley), but rather more sectorial and style rotation. Over the week growth and technology outperformed cyclicals. One explanation for this is that a Fed with a tightening bias – as the rate of change in economic growth decelerates – results in an environment in which the yield curve flattens, the dollar strengthens, and the equity risk outlook is mixed, leading to the market looking for companies with more growth characteristics. It remains to be seen whether this holds true.

On the virus front there was some bad news in the UK. The week saw the most coronavirus cases since February, with over 11,000 new cases reported affecting all age groups. This is the Indian or Delta variant, which appears to be far more infectious and twice as likely to send victims to hospital relative to the Alpha variant. This latest mutation has spread to South America, while COVID-19 continues to kill thousands daily on a global basis. Therefore, the need to vaccinate globally remains a top priority.

Finally, I feel it would be remiss not to mention the England vs Scotland European Championship game. It was the first time in 25 years that the two countries had met in a major competition. England on home turf were the hot favourites, it was going to be a walk in the park accordingly but clearly Scotland had not read the script. The match, if you do not know, ended in a 0-0 draw. No disaster but as usual, against all the hype and expectation, England failed to deliver.  As is often said… it’s the hope that kills you!

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