Most equity markets rose by around 2%, Shanghai was the outlier with a 5% gain, recovering most of July’s losses though Hong Kong stocks are still struggling in the wake of the Chinese clampdown on tech stocks. It was not all plain sailing though, equities suffered a wobble mid-month as worries mounted over the spread of the delta variant, the approach of Fed tapering and ‘peak growth’, before recovering again.

I have seldom read quite so much (over) analysis of bond yields and quite why they remain so low – despite higher inflation, upward pressure on wages and an improving economic outlook. I think that it is important to step back a shade from this debate and recognise that there is little chance of any real ‘price discovery’ going on in markets that are completely dominated by massive buyers (the central banks) with little apparent price sensitivity and deep pockets (lucky this isn’t a private institution rigging the market). Also, remember that there is a gargantuan stock of bonds out there so the Fed will be treading warily…we still expect ‘tapering’ to start in Q4. For now, simply focus on the miserable negative real yields on offer and stand back.

In recent comments, Jim Bullard, President of the St Louis Fed and member of the Fed’s FOMC, stated: “I don’t think that we need to continue with these [bond] purchases now that we’ve got new risks on the horizon and possibly inflation risks on the horizon.” He also said he thinks the FOMC should get the tapering going and finish the asset purchases by the end of the first quarter of 2022. He has also indicated that he expects the Fed to allow their balance sheet to run-off after taper is complete and allow market pricing to take over in long-term credit markets… Hmm, I’m not sure they are likely to relinquish control quite that quickly.

US 10- and 30-year bond yields have edged-up a shade (to 1.3% and 1.9% respectively) while the UK 10-year gilt is unchanged at 57bp. The US dollar has gained with the taper talk and the price of oil sold back down to $71 (Brent crude) after touching $65.

Within the equity markets, consumer discretionary stocks sold off, notably Amazon and LVMH (those China concerns), as did the miners with a falling iron ore price, notably Rio Tinto. Tech was quieter (away from Chinese tech) but Microsoft and Google made new highs again on the back of excellent figures. Pharmaceuticals saw a big jump in Novo Nordisk after raised guidance and probably also with the realisation of the big jump in diabetes occurrence recently. Practically all the financial sectors rose providing some encouragement to the ‘reflation’ trade.