After fears of inflation shocked investors in the early months of 2021, markets shifted in a different direction: a deep sleep.
The Vix, a measure of the expected volatility in Wall Street’s S&P 500 capital index, declined to the pandemic era low of 15.7 points on Friday, after rising above 80 during the early stages of the pandemic. A measure of volatility on foreign exchange markets produced by Deutsche Bank has also dropped to its lowest point since February 2020 last week.
Analysts say the quiet period partly reflects the Federal Reserve’s waiting tactics, which is poised to unleash an unusually high inflation spell without removing monetary support, whose recovery is likely to disturb markets. But some investors grow nervous as complacency sets in.
“We are feeling more and more alert” about calm conditions on the stock markets, said Gergely Majoros, a member of the investment committee of European fund manager Carmignac. “It means you need to keep your eyes wide open on what’s to come next.”
In a research note, the investment committee of Swiss bank Credit Suisse also warned of “a high level of investor satisfaction” in all asset markets, suggesting that there was “a risk of downside higher for the usual news flow ”.
Global stocks are set to record highs as the economies of developed nations recover from the emergence of coronaviruses, increasing companies ’profit prospects. But gains have been silenced in recent weeks, with some investors saying the good news has been provided for a long time. The FTSE All World gauge of developed and emerging markets has gained just over 1.4 percent so far this month.
Headline consumer price inflation in the United States touched 5 percent in the 12 months to May, after 4.2 percent April increase in prices linked to the reopening of the economy and to bottlenecks in the supply chain – such as used cars and raw materials – raised.
Central banks have traditionally tightened financial conditions to combat prices in a spiral. But the Fed, meeting this week, maintained that the inflation target is temporary. He managed to convince many investors of that as well.
“The markets agree, at least for now, with [Fed chair Jay] Powell that the inflation we are seeing is ephemeral, ”said Margaret Vitrano, portfolio manager at ClearBridge Investments.
A Bank of America survey of 207 global fund managers responsible for $ 645 billion in customer wealth this week showed more than seven in 10 believe that post-pandemic inflation would be transient. Many have already cut bond yields in anticipation of lighter Fed support for this market in the future, bringing the share of bonds in portfolios to a three-year low. A negative stance toward bonds was another factor that had convinced asset managers to stick to stocks, investors said.
“Equity is expected to continue to grow this year, but not at the same pace as when activity accelerated earlier this year,” said Caroline Simmons, UK head of investment. the direction of UBS’s wealth.
Low volatility is not always a signal to sell stocks, historical data suggest. Figures compiled by Schroders analyst Duncan Lamont showed that, since 1991, buying the S&P 500 on a day when the Vix was between 15 and 16 would have led to a total return of 14.6 percent in the next 12 months. .
But the sense of calm on the markets indicated a complacency that could crush, analysts said, if inflation plummeted ahead of Fed expectations.
“If persistent inflation means higher input costs that companies can’t afford … because household food and energy costs are even higher which really influences profitability,” said Vitrano of ClearBridge. Stock markets were “weighing water,” he said, “because it’s too early to make a call for it.”
Currency markets have also been paralyzed by the Fed’s prospects that it will keep financial conditions loose for longer than initially expected traders.
The dollar index, which measures the strength of the U.S. dollar against the currencies of trading partners, has gone less than 1 percent higher this year, after strengthening in the first quarter and then giving up. most of his earnings since.
“The main narrative for inertia in [currencies] it’s pretty clear, and underscores the gap between the irresistible force of U.S. reflection and the real estate object of an ultra-patient Fed, ”said Paul Meggyesi, head of global FX strategy at JPMorgan.
The Conference Council predicts that U.S. economic output will increase at an annualized rate of 9 percent in the second quarter of this year, moderating thereafter. The companies ’earnings are expected to follow a similar trajectory.
Analysts predict that the earnings of the companies listed on the S&P 500 will increase by a combined 35 percent this year, hitting a 12 percent gain in 2022, according to FactSet. On the Stoxx Europe 600, profits will grow 51 percent this year and 14 percent in 2022.
“The only direction the Fed and other central banks can take now is to reduce lending, and that could cause correlation shocks,” led by rising bond yields, said Olivier Marciot, manager of cross-asset investments in Unigestion. “Markets are a way of waiting, it’s not about what happens next but when.” . . If you move too fast in the game you will be hit. ”