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Moderating expectations

The seemingly never-ending pandemic-induced restrictions and uncertainty is making the forward planning of summer activities quite precarious and frustrating at times. That capital markets have recently borne fewer surprises than the planning of our summer holidays is a rare event and should be cherished – assuming it is not simply the calm before the next storm. Following the previous week’s short-lived stock market sell-off – a reaction to the apparent acknowledgement from the US Federal Reserve (Fed) that the US economy may not require ‘emergency-room’ level interest rate suppression support for years to come – last week’s main discussion point centred on whether and how much the US rate setters were divided in their outlook. The less debated point was the undeniable turning point of US central bank monetary policy. It changed direction from ‘easing/dovish for the foreseeable future’ to ‘eventually tightening/hawkish perhaps as early as next year’ and this did not cause similar capital market stresses as in 2013, when the Fed last signalled a medium-term change in direction which triggered the ‘taper tantrum’ market upset.

 

Inflation isn’t always inflationary

The inflation discussion has become a little – well – inflated lately. ‘The Great Reflation’ has long been a popular counter-theme to the pandemic malaise among the market commentariat, but it feels as though volumes have been written about global price levels in the last few months alone. The big question is whether, as we come out of the pandemic, inflation will normalise or propagate. Everyone has an opinion, ranging from forecasts of deflationary sluggish and stubborn growth to a new age of supercharged prices on the back of an overheating economy. Most central banks are still feeling dovish about the post-pandemic world – preferring to describe price rises as transitory inflation, although last week the Fed appeared less certain how transitory such price rises are. Nevertheless, most major central banks in the developed world are keeping monetary policy loose, rather than pre-emptively choke off inflation and with it potentially a lasting economic recovery. Meanwhile, the Bank of England’s outgoing chief economic (and eternal hawk) Andy Haldane has been warning of the hyperinflationary danger looming down this path.

 

Europe’s green deal

How much is a ton of CO2 worth? Quite a lot these days, as it turns out. Amid the good mood in capital markets, there has been a notable rally in European and British carbon prices – with a ton of CO2 (or equivalent emissions) now purchasable for around €55. That is a 60% increase from back in November, and an almighty jump from just a few years ago. For those unfamiliar with the intricacies of emissions trading, this begs the question: why on Earth would anyone pay for a ton of carbon?

 

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