Global bonds rallied while stocks retreated as slowing growth in China and the rapid spread of the Delta variant of coronavirus fueled fears about the health of the global economy.

UK

The FTSE 100 lost 1.6% over the week. Shares were pressured by a continued sharp growth in the COVID-19 infection rate which undermined hopes of economic recovery with thousands of people told to self-isolate after being pinged by the NHS Covid app. England is due to lift all remaining restrictions on Monday 19 July, with the responsibility for measures such as masks and social distancing shifting to individuals and companies.

UK inflation, as measured by the consumer prices index, rose 2.5% in the 12 months to June. This is above the official target and puts pressure on the Bank of England to reduce its debt purchases, with two policymakers already backing such a move and one MPC member hinting that interest rates may have to rise earlier than expected.

The Bank of England removed restrictions on bank dividends and share buybacks imposed during the pandemic, judging the sector to be resilient enough to absorb any further pandemic-related shocks.

Revolut, the London-based digital banking start-up, raised $800m in a funding round that makes it the UK’s most valuable private tech company at $33bn.

US

The S&P 500 slid 0.5% over the week.

Federal Reserve chair Jay Powell moved to reassure markets that the current high rate of US inflation did not mean high inflation would persist. He also reiterated the US central bank’s commitment to maintaining its pandemic-era stimulus until there was more certainty around the strength of the economic recovery.

US headline consumer prices rose 0.9% over the month of June, the largest monthly gain since 2008. The rise took the annual rate of inflation to 5.4%, the highest level since August 2008. A rise in prices of used vehicles made up more than a third of June’s CPI increase, after a computer chip shortage curtailed new car production. Core inflation rose to 4.5% in June from 3.8% in May.

US retail sales unexpectedly rose in June, rising 0.6% over the month compared to forecasts of a 0.4% fall.

The University of Michigan’s consumer sentiment index fell to 80.8 in June from 85.5 in May with consumers increasingly worried about soaring prices.

Europe

The FTSEurofirst 300 dropped 0.7% over the week.

Eurozone inflation eased to 1.9% in June from 2% in May, according to Eurostat, easing inflation fears.

Eurozone industrial production fell 1.0% in May amid widespread shortages of semiconductors and other materials.

Japan

The Nikkei 225 gained 0.2% over the week.

The Bank of Japan kept monetary policy unchanged but downgraded its growth forecast to 3.8% for the current fiscal year to March 2022, from 4% in April.

Pacific Basin ex Japan

China’s GDP rose 7.9% in the second quarter compared with the same period last year, a significant slowdown from the 18.3% gain in the first quarter which benefitted from base effects. On a quarterly basis, the Chinese economy grew 1.3% in the second quarter, up from 0.4% in the first three months of the year. Retail sales rose 12.1% in the year to June, compared to 12.4% in May and 17.7% in April.

Taiwan Semiconductor Manufacturing Company signaled that the global chip shortage may have moved past its most crippling stage.

New Zealand’s central bank said it would halt bond purchases this month becoming the second developed nation after Canada to step back from a pandemic monetary stimulus.

Bonds

The yield on the 10-year US Treasury bond declined to a three-month low despite stronger-than-expected inflation, closing the week at 1.31%.

The 10-year German Bund yield ended the week at -0.35%.

US credit rating agencies are upgrading ratings at a record pace as the US economy rebounds. Roughly $361bn of higher-rated, investment grade bonds have been upgraded in the past two months, including a record $184bn in June, according to data from Bank of America.

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Image by Mediamodifier from Pixabay