Since mid-June, financial market performance has been very mixed. Regional equity market performance has varied, US benchmarks have made steady gains (+2.5%) led by a rebound in the technology sector, whilst European and UK markets have slipped -2.5% and -4.0% respectively.

In the US, the yield curve has flattened, with US 10-year yields falling c. 0.32% to 1.25%, whereas the 2-year yield has edged up 0.07% to 0.20%. Corporate credit has made gains, but high yield has pared some of these gains in recent days. Since mid-June Gold is modestly higher (+1%), the US Dollar is stronger (+2.2%) and Brent crude has fallen -6.8% dipping below $70/barrel.

The main market drivers in recent weeks have been the US Federal Reserve’s (Fed) policy meeting and more recently renewed pandemic concerns. The Fed’s June updated economic projections, rate dot-plot and language came as a surprise to many investors and unsettled consensus positioning. The Fed’s updated economic projections and dot-plot indicate its tolerance for “moderate” inflation overshoot. Under its new average inflation mandate this is lower than previously thought and the policy reaction function is less patient. The projections for unemployment were largely unchanged, suggesting the Fed’s willingness to talk about tapering (reducing the rate of monthly asset purchases) comes from the upward revisions to the inflation outlook in 2021 and a wish to exercise more control in anchoring inflation expectations. At the press conference following the meeting, Chairman Jerome Powell made less use of the “transitory” inflation mantra, that had previously bolstered expectations of policy inaction, and acknowledged the upside risks.

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