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Market Commentary June 2021

Posted: 24th June 2021   |   Share

By Sarah Ryman

Bitcoin Broken Heart

G7 in Cornwall has been a hot topic this month – if the glorious beaches, perfect weather and dinner with the queen weren’t enough to promote better teamwork then I’m not sure what is.  Leaders of the G7 economies have agreed to provide 1 billion coronavirus doses to poorer countries by the end of 2022 with a goal to ‘vaccinate the world’.

UK

The UK chancellor Rishi Sunak is trying to win a carve-out for the City of London in the G7’s plans for a new global tax system to cover the world’s “largest and most profitable multinational enterprises”.  He has highlighted that the “historic agreement” by G7 finance ministers would force “the largest multinational tech giants to pay their fair share of tax in the UK”. 

The UK economy grew by 2.3% in April, according to figures released this month, thanks to the government easing restrictions.  This is the fastest monthly growth of gross domestic product (GDP) since July 2020 and just exceeded economists’ expectations of 2.2%.   With the grand ‘reopening’ of the UK having been stalled for a month it will be interesting to see how fast growth is maintained as we move towards a new normal but the CBI are enthusiastic having upgraded its latest forecast for the UK economy to 8.20% from a previous forecast of 6%.  If the commentators are right then the UK economy will bounce back to pre-Covid levels by the end of 2021. 

Inflation meanwhile has exceeded expectations jumping to 2.1% in May which is up from 1.5% in April.  Andrew Bailey, Governor of the Bank of England, had commented last month that he would not hesitate to tighten monetary policy, most likely by raising interest rates from their current 0.1%, if price rises appeared to be consistently outstripping the target rate of 2%.  As I type however the probability of rate rises according to the World Interest Rate Probability charts on Bloomberg remains low over the course of 2021 with some starting to look to May 2022 as the first hikes.

Unemployment has fallen to 4.7% between February and April which is the sixth consecutive month of improvement but the number of those in employment is still over half a million lower than pre-pandemic levels.  Manufacturing is picking up with output growing at the fastest pace on record in the last quarter. 

UK borrowing is now at its highest since March 1962 and annual borrowing in March 2021 was the highest annual borrowing figure since World War 2.  To put this in context, UK debt is now nearly 100% of GDP. 

EUROPE

The European Central Bank (ECB) confirmed this month that they intend to continue bond purchases despite growth and inflation in the area.  The pandemic emergency purchase programme (PEPP) allocated EUR1.85 trillion to fight the crisis and the ECB said that purchases in the three months to September would be at “a significantly higher pace than during the first months of the year.”  President Christine Lagarde said that although the economy was “gradually reopening” and inflation was expected to continue rising this year, the central bank expected price growth to fade again next year.  She explained that there is still “significant economic slack that will only be absorbed gradually over the projection horizon” and any tightening of monetary policy would be “premature” and could threaten the recovery. 

US

A similar stance has been taken by the Federal Reserve with most central bank officials feeling that the inflation surge in the US will be transitory.  Whilst fiscal expansion is starting to build, some economists are concerned that the Fed may react too slowly to manage the rise in inflation.  US consumer prices have had the highest year-on-year rise for 13 years in May according to figures released this month and were 5% higher than last month.   Fed officials have reacted by highlighting in this month’s meeting that they expect to start raising interest rates in 2023 which is earlier than the 2024 previously forecast.  Will this be soon enough?  The proof will no doubt be in the pudding.

With the addition of over half a million jobs last month the labour market in the United States is starting to regain momentum but there are some fears that worker shortages may hold back the economic recovery. 

COMMODITIES

Elon Musk tweeted #Bitcoin followed by a broken heart symbol this month which triggered a sharp fall in the price of the cryptocurrency as investors feared the Tesla tycoon had fallen out of love with bitcoin.  Most of the losses were broadly recovered to trade back over $41,000 only to then briefly drop below $30,000 later in the month following a sweeping, global regulatory crackdown aimed at reining in the largely unregulated market. 

 

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