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Investors in the $51tn US stock market are coming around to the view that the spread of the Delta coronavirus variant will dampen the global economic recovery, threatening a record-breaking rally.
The benchmark S&P 500 index on Wednesday fell by the most in a month, while it was moving modestly upwards on Thursday. Major stock indices in Europe and Asia closed lower on Thursday.
Signs of a slackening recovery have been accumulating in recent weeks as the coronavirus spreads again, with surveys pointing to weaker growth in business activity in several regions of the US as well as deteriorating consumer confidence trends. Data on Tuesday added to the worries confronting investors, as retail sales in the country dropped more quickly than expected. Weak economic data from China has only added to concerns.
Covid risks are re-emerging as a really important downside risk.
Coupled with signals that Federal Reserve policymakers are readying to pare back emergency stimulus measures in the months ahead, money managers voiced doubt over stocks’ ability to rise beyond already lofty levels. Trading in options markets underlined the cautious view by investors, as many traders on Thursday turned to derivatives that would protect against equities falling in value.
“The market is at all-time highs,” said Jim Tierney, a portfolio manager at AllianceBernstein. “Look at where we’ve come in a year . . . Look at the elevated price-to-earnings ratios. You put a lot of that together and people are just nervous and their inclination is, ‘Let me take a little money off the table.’”
The surge of coronavirus cases tied to the more contagious Delta variant prompted economists at Goldman Sachs on Wednesday to almost halve their forecast for US growth in the third quarter. They now predict a 5.5 per cent expansion in gross domestic product between July and September, a sharp downgrade from their previous estimate of 9 per cent. That dragged their full-year forecast 0.4 percentage points lower to 6 per cent for 2021.
“The impact of the Delta variant on growth and inflation is proving to be somewhat larger than we expected,” economists at the bank said. “Spending on dining, travel, and some other services is likely to decline in August, though we expect the drop to be modest and brief.”
Federal Reserve officials also appear to be more attuned to the risk that the economy may not reopen, or the jobs market recover, as smoothly as initially expected given Covid-19 concerns. Chair Jay Powell made the case at the last meeting on monetary policy in July that the economic impact from the Delta variant may not be as significant as previous outbreaks, but minutes from that gathering suggest heightened awareness that surging cases could delay any pivot away from their stimulus.
“Covid risks are re-emerging as a really important downside risk,” said Jonathan Millar, senior US economist at Barclays. “It is back on the [Fed’s] radar and the wording in the minutes gives them the freedom to put a hold on tapering.”
Yields on Treasury bonds, the backbone of global financial markets, have whipsawed this month. But in recent days they have slid toward a six-month low, underscoring persistent demand for the haven securities as the economic picture has become hazier.
“Nobody is pointing at things and saying they are cheap,” said John Leonard, the global head of equities at Macquarie Asset Management. “The argument is we all know the party has to end at some point, but it’s not quite time to leave the party just yet because the alternatives are pretty unappealing.”