Financial Markets Update – June 2021

How have the financial markets performed?

The UK stock market rose by another 1% in May, which means that its year-to-date gain is nearly 11%. Since the Pfizer vaccine received approval and it was announced that the vaccine was effective against Covid-19 (seven months ago), the market has risen by 30% and moved past its pre-pandemic level this month.

With bonds and cash continuing to provide measly returns against a worldwide backdrop of unprecedented monetary and fiscal stimulus and booming economies, it is little surprise that the path of least resistance for stock markets is upwards, even though valuations are certainly far from cheap.

Inflation continues to be the biggest concern

Without a doubt, the biggest threat is the return of inflation, dormant for so long but never extinct. Last week, it was confirmed that prices in the US had increased by 5% over the past 12 months, the fastest increase since August 2008.

In China, the home of cheap manufacturing and a main engine of the deflationary trends, we have seen over the past decade, factory gate prices rose by 9% in the year to May. China is now seeing the same demographic trends as most of the Western world, with an ageing population, declining birth rate (despite the relaxation of first it’s one child and then its two-child policies) and a shrinking workforce.

Bond markets

Bond markets, however, have not been affected by the latest inflation numbers, and seem willing to accept the promise of central bankers that the rise in inflation is transitory. And that is the big question – is it transitory or the beginning of a more structural trend that could see central bankers suddenly thriving, through higher interest rates, to get the inflation genie back into its bottle? Watch this space!