Economists cut expectations, investors worried about delta variable
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Investors in the $51 trillion US stock market are getting closer to the view that the delta spread of the coronavirus will dampen the global economic recovery, threatening a record high.
The benchmark S&P 500 fell on Wednesday by the most in a month, while it was moving slightly higher on Thursday. Major stock indexes in Europe and Asia closed lower on Thursday.
Signs of a slow recovery have accumulated in recent weeks as the coronavirus spreads again, with surveys indicating weak growth in business activity in many regions of the United States as well as deteriorating consumer confidence trends. Tuesday’s data added to the concerns facing investors, as retail sales in the country fell more quickly than expected. Weak economic data from China added to concerns.
Along with signs that Fed policymakers are ready to scale back emergency stimulus measures in the coming months, money managers have expressed doubts about stocks’ ability to rally beyond already high levels. Trading in the options markets confirmed the dovish view by investors, as many traders on Thursday turned to derivatives that would hedge against a drop in stock value.
“The market is at an all-time high,” said Jim Tierney, portfolio manager at AllianceBernstein. “Look at what we got in the year…Look at the high P/E ratios. I’ve put a lot of that together and people are nervous and their tendency is, ‘Let me take a little money off the table.'”
A surge in coronavirus cases linked to the most contagious delta variant prompted Goldman Sachs economists on Wednesday to roughly halve their forecast for US growth in the third quarter. They now expect a 5.5 per cent expansion in gross domestic product between July and September, a sharp drop in the credit rating from their previous 9 per cent estimate. That lowered their full-year forecast 0.4 percentage point to 6 percent for 2021.
“The impact of the delta variable on growth and inflation has proven to be somewhat larger than we expected,” the bank’s economists said. “Spending on food, travel and some other services is likely to decline in August, although we expect the decline to be modest and brief.”
It also appears that Fed officials are more willing to risk reopening the economy, or the labor market recovery, not as smoothly as initially expected given Covid-19 concerns. President Jay Powell made the case at the last monetary policy meeting in July that the economic impact of the delta variable may not be as significant as the previous outbreak, but the minutes from that gathering signal a growing awareness that rising cases could delay any pivot away from them. Stimulus.
“Covid risks are re-emerging as a really important downside risk,” said Jonathan Millar, chief US economist at Barclays. “I’m back on [Fed’s] Radar and crafting in the minutes give them the freedom to suspend tapers.”
Treasury yields, the backbone of global financial markets, have fallen this month. But in recent days, it has slid towards its lowest level in six months, underscoring continued demand for safe-haven securities as the economic picture becomes more dire.
“Nobody points to things and says they’re cheap,” said John Leonard, global head of equities at Macquarie Asset Management. “The argument is that we all know the party has to end at some point, but it’s not yet time to leave the party because the alternatives are a bit unattractive.”