I have a few speaking engagements coming up, prompting me to update my view on the world beyond the borders of the Eurozone, which makes up the day job. One trend that I am looking forward to present to, and discuss with, investors and capital allocators is the tension between signs that the inflation and interest rate shocks are now fading, in a cyclical sense, and the risk that inflation will stabilise above 2%, posing a challenge for monetary policymakers. Will they channel their inner Volcker or fudge the 2% inflation target?
Read MoreSpare a thought for the Fed. The hope that inflation had peaked in March was brutally dashed last week as headline inflation printed a new high, of 8.6%. A 50bp rate hike this month is now all but certain, with many forecasters looking for 75bp. We could also spare a thought for the BoE. The Old Lady told markets last time in convened that it expects inflation to rise above 10% by Q4, that the economy could well fall into recession, but that it will continue hiking anyway. Or maybe, we should spare a thought for the ECB. Last week, Ms. Lagarde informed investors that the central bank intends to raise rates by 50bp, at least, between now and September, followed by a "sustained and gradual" rate hikes. Yields and spreads rose on the day, likely more than the ECB would have expected, let alone liked, and the euro weakened. The central bank we shouldn't spare a thought for, however, is the BOJ, apparently.
Read MoreMarkets have been propelled by a fairly simple story in the past nine months, split across two themes. First, market prices have been driven by the expectation that vaccination will once-and-for all allow us to put the virus in our rearview mirror, and secondly, that fiscal and monetary policy will remain primed for support. This story was always going to be challenged at some point in 2021 as vaccination programs reach their climax and policymakers inevitably begin to consider what degree of stimulus that is needed in a world not in the grips of a pandemic. And wouldn’t you know it; here we are. As far as the success of the vaccines is concerned, it is crucial to remember that the final path to a full reopening is as much a question of politics as it is about epidemiology. Indeed, at this point, I am inclined to believe that it is mostly about politics. This isn’t surprising. Cases were never going to zero—at least not as long as we keep testing at the rate we’re doing at the moment—and new variants were always going to elude the vaccines, one way or the other.
Read MoreWhat a week, eh? It feels as if my last dispatch at the beginning of the month was written a lifetime ago. The sell-off in equities was already severe by then, and I was in a buy-the-dip mood. My initial intuition proved correct; the rebound happened, as did the new low. My prediction of subsequent choppy sideways movement was brutally refuted, however, sell-off, a surge in volatility and dislocation across multiple markets to an extent not experienced the financial crisis. There are so many things we don’t know, so let’s start with the few things we do. Covid-19 is now morphing into a hit to the real economy not seen since the financial crisis. The virus’ foothold in Europe is strengthening, and country by country are now shutting down their economies in a desperate attempt to avoid the disastrous scenario unfolding in Italy. The U.S. and the U.K. are acting as if they’re somehow immune or different, I fear they aren’t. In any case, it is besides the point. The global economy is now in recession, and the scrambling action by fiscal and monetary policy is really just an attempt to prevent an economic shock turning to a prolonged crunch with a wave of private sector bankruptcies and soaring joblessness.
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