Global stocks hit an all-time high amid expectations that the economic recovery will remain robust outweighed caution over whether the Federal Reserve will start to talk about tapering at its next policy meeting.

At the G7 summit in Cornwall, western leaders rejected austerity in a post-Covid world and vowed to continue with economic stimulus. However, tensions between the UK and EU continued over the Northern Ireland protocol, with both sides ramping up the war of words.

UK

The FTSE 100 rose 0.9% over the week.

The delta variant first found in India became the dominant Covid-19 strain in the UK. The variant, which is at least 40% more infectious than the previously dominant alpha variant, is expected to delay the UK’s final planned easing of restrictions on 21 June.

UK GDP expanded 2.3% in April, its fastest pace since the coronavirus reopening last summer. Strong retail spending and the full resumption of schooling boosted output, raising hopes of a rapid rebound to pre-pandemic levels of output.

US

The S&P 500 inched higher by 0.2% over the week, closing at an all-time high.

Joe Biden initiated a task force to boost the resilience of supply chains and moved to examine new tariffs on the Chinese rare earth magnets that are used in goods including electric vehicles and smartphones.

Headline US consumer price inflation rose by a faster-than-expected 5.0% in the 12 months to May. This was the largest increase since 2008 and compared to a rate of 4.2% in April. The core inflation rates, which excludes food and energy, increased at an annual rate of 3.8% in May, the most since 1992 and compared to a 3.0% rise in April.

Europe

The FTSEurofirst 300 gained 1.2% over the week, with stocks reaching a fresh high. Travel-related stocks were boosted by reports the Biden administration had taken the first step towards relaxing coronavirus-related travel bans.

The European Central Bank raised its eurozone growth and inflation forecasts but pledged to maintain the pace of its pandemic-era government debt purchases at it its latest monthly meeting.

Construction industry executives across Europe have warned that “dangerous” price rises and shortages of many building materials risk undermining the EU’s flagship €800bn economic stimulus programme.

Germany’s finance minister played down the surge in German inflation in May, which increased at the highest rate in more than two years. Olaf Scholz said it was a ‘temporary phenomenon, blaming the rise on “adjustment effects” and singling out the recovery from the coronavirus pandemic in certain sectors of the economy, which has disrupted supply chains and pushed up demand for everything from raw materials to semiconductors.

Poland and Hungary signaled they will not support the plan to introduce a global minimum corporate tax level agreed by G7 finance ministers unless there is a carve-out to protect substantive business activities in their countries. Poland’s headline tax rate is 19%, while Hungary’s is 9%.

Japan

The Nikkei 225 closed the week flat.

Pacific Basin

China’s producer price index increased 9% in May, compared to a gain of 6.8% in April. This was the biggest year-on-year increase since September 2008 and above forecasts.

Chinese exports grew 27.9% year on year in May, although they missed expectations of a 32.1% rise. Exports were affected by a Covid-19 outbreak in the southern part of the country which curbed activity at some of China’s biggest ports.

Taiwan’s Covid-19 outbreak has spread into the country’s electronics factories and is threatening to delay semiconductor shipments, further adding to the disruption caused by a global shortage which is expected to last at least another year.

Emerging Markets

Russia’s central bank raised its key interest rate by 50 basis points to 5.5% in an effort to tame inflation, which is running at its highest level for almost five years. This is the third consecutive rise since March. Annual consumer inflation in Russia rose to 6.0% in May, the highest level since October 2016 and well above the central bank’s target of 4.0%.

Mexican president Andrés Manuel López Obrador looked set to lose a two-thirds supermajority in Mexico’s lower house of Congress which he had needed for significant constitutional changes.

Bonds

US bonds had their best week in a year, with the yield on the 10-year US Treasury bond closing the week at 1.47%, around its lowest level since March. Despite the jump in the rate of annual inflation, investors appeared to believe that the increase would be temporary and will settle down once the depressed pandemic-related numbers from 2020 fall out of the year-to-year data, with US break-even rates, a measure of inflation expectations, easing.

The 10-year German Bund yield ended at -0.27%. The forthcoming week will see the sale of the first tranche of pan-EU debt, agreed as part of the EU recovery fund.

Commodities

Brent crude breached $72 a barrel, its highest level since May 2019.

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Image by Gerd Altmann from Pixabay