Is A Global Market Correction On The Cards?

As long as the Fed leads easy monetary policy, a muted reaction to tapering money supply may be in the offing.

- Maarten Mittner

The remarkable recovery in markets since the pandemic lows in 2020 have fuelled renewed jitters that some form of correction is imminent. Because the economic reality does not justify present valuations.

Fears rest on the growing impact of the Covid-19 Delta variant, the most contagious up to now, as well as indications that the US Federal Reserve may soon start “tapering” its quantitative easing programme. Sterling company results, on the other hand, supported markets in the second quarter, with more than 80% outperforming consensus views in the US.

The US 10-year bond – the world’s most important financial indicator – traded at a yield of 1.25% at the end of July. After shooting up to 1.77% in March on inflation concerns, the yield dropped to as low as 1.13% since. That surprised some analysts, many of whom are still predicting the yield to end the year at around 2% on inflation concerns.

At these levels the 10-year is telling us that inflation is not the problem. Growth is. The Fed has been vindicated with its view that the present higher inflationary trajectory is transitory. The lower yield reflects risk-off, safe-haven trade in anticipation of lower growth. Or a possible bout of renewed deflationary pressures.

If that is the case, equity markets remain remarkably complacent. Buoyant even. Because if growth is the problem, markets should be much more circumspect about future earnings. Then present levels may prove to be too optimistic.