Global Markets Update – Monday 21 June 2021


The “reflation trade” reversed after the Federal Reserve unexpectedly signaled a shift in its stance on inflation, indicating that rates may rise in 2023.


The FTSE 100 dropped 1.6% over the week.  Travel and leisure stocks were hit by the UK government’s decision to delay a full reopening of the economy by four weeks.

UK retail sales fell 1.4% over the month of May as the reopening of indoor restaurants and bars hit supermarket sales. In contrast, sales at non-food shops rose on demand for outdoor furniture.

The UK inflation rate jumped to 2.1% in the year to May, compared to 1.5% in April and the highest for almost two years. The rate is now above the Bank of England’s 2% target for inflation.

The Liberal Democrat Party won the Amersham and Chesham by-election by a significant margin and overturning a Conservative majority of more than 16,000. A backlash against planning reforms and the unpopular HS2 rail link was blamed for the Tories loss of a supposedly safe seat, with some commentators indicating that other seats in the South could be lost as Boris Johnson targets keeping control of ex-Labour seats in the North.


The S&P 500 lost 1.9% over the week, its largest weekly loss in four months, while the tech-heavy Nasdaq closed the week virtually unchanged. The reflation trade reversed, with growth stocks outperforming value and smaller companies underperforming large-cap stocks, with the small-cap Russell 2000 index recording its heaviest weekly loss since late January as it fell more than 4%. The moves followed comments from Fed chair Jay Powell that were taken as a signal that the US central bank would act to tame inflation and that policymakers were not solely focused on aiding the country’s hard-hit labour market.

While the Fed kept rates on hold, policymakers projected that interest rates would rise from record-low levels in 2023. Previously, they had forecast that there would be no rate rises until 2024 at the earliest. Fed chair Jay Powell also said officials were “talking about talking about” reducing the Fed’s $120bn-a-month asset purchases. The Fed also forecast that US GDP would expand 7% in 2021, compared to a previous estimate of 6.5%.

US retail sales fell 1.3% over the month of May.


The FTSEurofirst 300 slid 1.1% over the week.

The head of Germany’s central bank urged the European Central Bank to end its bond-buying programme in the coming year.


The Nikkei 225 closed the week unchanged.

Emerging Markets

Brazil’s central bank raised its benchmark interest rate for the third time this year as authorities in Latin America’s largest economy move aggressively to tamp down on rising inflation. The 75 basis point increase brings the Selic rate to 4.25% in an attempt to tackle soaring inflation, with rose by more than 8% in the year to May.


The yield on the 10-year US Treasury bond closed the week at 1.46%, while the 10-year German Bund yield ended at -0.20%.

US inflation expectations shifted lower as investors viewed the earlier-than-expected projections of a US rate rise as a signal of the central bank’s willingness to control inflation. The yield flattened as the 30-year US Treasury yield plunged to its lowest level since February, while the yield on the two-year note hit its highest level in a year.

The premium between corporate debt and US Treasuries dropped to its lowest level in more than a decade in a sign that investors are growing confident recent rises in inflation will not hinder the economic recovery. The spread between US Treasury yields and investment-grade corporate bond yields has fallen to its lowest level since 2007, while for high-yield bonds the spread fell below a post-crisis low last set in October 2018.

The yield on Greece’s five-year bond fell below zero for the first time. The move leaves Italy as the only eurozone member with positive five-year yields.


The US dollar had its best week since April 2020 as yields on short-term Treasuries rose, pricing in future expected rate rises.


The Bloomberg Commodity index had its worst week since the start of the pandemic. Gold fell 6% over the week, its largest weekly fall since March 2020, as the US dollar rallied, while copper lost 8%.

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Image by Gerd Altmann from Pixabay