William John Market Report 18-05-21
William John Market Report 18-05-21Category: Reports
Amidst inflation worries, worldwide equities have lost their post-pandemic momentum this week. The S&P 500, a stock index composed of the largest 500 companies weighted by market capitalisation on U.S. stock markets, fell 0.606% from Friday’s close in early morning trading on Monday:
Europe’s STOXX 600 and Britain’s FTSE 100 saw similar stagnation:
Inflation, which rose by 4.2% during the month of April in the U.S., was the highest consumer price level rise since the Financial Crisis in 2008. It erodes investor’s real returns in the equity and fixed income markets and its effects seem to have halted financial market bullish trends in the past week or so. The likelihood of market sentiment being principally concerned with inflation has been confirmed by a rise in the price of gold:
Gold is popularly seen as an effective hedge against inflation for investors because its price is continually adjusted to reflect inflation. If the value of the dollar decreases as prices rise, the cost of an ounce of gold in dollars will also rise to compensate owners of gold for rising price levels, effectively protecting those owners from inflation. Thus, when inflation exceeds common inflation targets of around 2%, investors move to purchase gold to hedge their real losses in the equity and fixed income markets.
A rising gold price per ounce, stagnating equities markets and historically low yields in the fixed income markets points to the monetary policies of the ECB, Bank of England and the Federal Reserve reaching their effective limit. The difficult issue, though, is that government marshalling of Covid-19 restrictions must ease as these central banks begin to contract their policies, i.e., hike the interest rate and reduce asset purchasing to bring inflation back into line. If economies remain shut, reversing monetary policy stances may only cause further damage. Output and income from aggregate economic demand returning to pre-pandemic levels is needed to combat inflation. It remains to be seen how central banks and government will collaborate to ensure this happens.
Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.