Equities traded sideways in June. The yield curve continued to flatten, especially in the immediate aftermath of this month’s meeting of the Federal Reserve. Beneath the surface both defensive and growth stocks traded much better as investors fretted over the impact of the Delta Covid variant. The variant, which first originated in India, is now the dominant strain in many countries including the UK. While there is little sign that Delta causes more serious illness, it is clearly more transmissible and has brought into the question the speed of re-openings.
Despite the flattening of the yield curve, we think it is premature to anticipate the end of the cycle. Fiscal and monetary policy remain extremely supportive and much of the world has still to fully open-up. In those countries where vaccinations, and therefore re-opening, are furthest advanced, economies are robust. US house price growth accelerated at its fastest pace in over 30 years for the second month in a row with strong demand and a shortage of supply leading to prices increasing 14.6% year on year. In the UK, the June Nationwide house price index rose 13.4%. In both countries ‘survey’ measures of economic activity are strong across the board.
For the first time in many years the political consensus is very much in favour of fiscal stimulus. The political wrangling over President Biden’s infrastructure bill continues but it is highly unlikely that the US will fall short in stimulating the economy. In Europe, the German finance minister, Olaf Scholz, dismissed suggestions that German and EU fiscal rules should be tightened. Strong economic growth, stimulative policy, and low real interest rates continue to fuel debate over the inflation outlook. Substantially tighter monetary policy remains the biggest risk for asset markets but looks unlikely in the short-term. After a period of consolidation, we expect equities to move higher in the second half.