From reopening cheer, markets swing to growth fears

Published Wed, Jul 21, 2021 · 05:50 AM

AFTER a first half built on reopening hopes, a sudden bearish turn has replaced inflation fears with growth worries - sharply dividing Wall Street. Reflation trades and optimism about a V-shaped economic recovery has given way to talk of peak growth and doubt about the durability of a rebound built on the belief that the pandemic is over.

Deutsche Bank's George Saravelos said the market is hedging for "secular stagnation 2.0", with consumers cutting back demand. A quantitative Danske Bank model, meanwhile, painted "a clear picture of a peak in the global industrial cycle". Nomura's Jordan Rochester says markets are "pricing a global growth slowdown." To be sure, the moves may have been exaggerated by thin summer trading and could be technical as traders take some chips off the table of an ebullient rally. In a note to clients, Marko Kolanovic, the chief global market strategist at JPMorgan Chase & Co, forecast a rapid return of reflation trades such as cyclical stocks, bond yields, high beta stocks "as Delta variant fears subside and inflation surprises persist". Yet clearly the speed and scale of Monday's gyrations caught many off-guard.

The compensation investors demand to hold longer-term US Treasuries versus rolling over short-dated obligations (or term premium), has fallen to zero. Effectively bondbuyers are no longer requiring recompense to lock up their money. That partly reflects a belief that the economy won't overheat excessively, with inflation out-of-control and eating into the real value of future bond payments.

US stocks most tied to economic growth are now languishing behind shares of companies that witness all-season demand. BLOOMBERG


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