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Earnings vs Delta

It has been a quiet week in equity markets. The world’s major stock indices mostly continued their recent holding pattern, awaiting news on where things will go from here. As we have written before, the global transition phase we find ourselves in – between a forced economic ice age and whatever comes next – makes it more challenging to know how to interpret the variety of signals on display. On the one hand, we have rapid vaccination programs, continually supportive policy and more liquidity flowing around than anyone knows what to do with. On the other hand, a surge in Delta variant cases, fears of an abrupt end to fiscal support and the hugely uncertain long-term economic effects of the virus are weighing down on sentiment.

How negative are yields?

Investors chase returns. That statement may seem too obvious to be interesting, but over the last decade
it has had a special significance. For a year and a half now, Central Banks around the world have pinned
interest rates down, and poured historic amounts of liquidity into the global financial system. But the era of loose monetary policy long predates the pandemic. The financial world has experienced an era of low rates since the global financial crisis. More ingredients have been added in the last 18 months, but the recipe is the same: Central Banks prescribe zero or even negative interest rates, coupled with vast and seemingly unlimited asset-purchase programs, in the hope of reflating their economies. There have been exceptions to this (such as China, which has remained relatively tight throughout the pandemic), but the policy has been ubiquitous in major developed markets.

 

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