In the BlackRock Investment Institute’s weekly market commentary, the group warned of “more temporary risk-off episodes” in markets over the rest of the northern hemisphere summer as the spread of the Delta strain created more variability in outcomes around the economic recovery from the pandemic.
“Market volatility is on the rise, as worries about new virus strains have been exacerbated by stretched positioning and light summer trading,” BlackRock said.
“Recent swings in market sentiment reflect the unusually wide range of potential outcomes beyond the current economic restart, in our view. Market sentiment has been swinging between extremes: One week the concern is runaway inflation; the next it’s the prospect of a deflationary spiral.”
The investment manager noted that positive economic data was not being given as much weight by market participants as concerns around the spread of Delta, with real yields in the US bond market having dropped back toward record lows and sector-based gains in equity markets having quickly reversed.
“We believe these swings are to be expected, given the wide range of potential outcomes beyond the current restart of economic activity,” BlackRock said.
“We believe the powerful restart of economic activity remains the key story for markets, and it’s too early to make the determination that new virus strains will derail this. The evidence on vaccines is still consistent with their expected effectiveness, in our view, as reflected in hospitalizations significantly lagging the recent rise in cases due to the delta variant.”
The investment manager was positive that “vaccines remain the way out” of the COVID crisis, given that pressure on hospitals remained low despite the rise in cases among countries that were highly progressed in their vaccine roll-outs.
“Asian and emerging market economies struggling with vaccination rollouts are suffering most in terms of health outcomes and mobility restrictions,” BlackRock said.
The group said while it expected the global economic restart to continue in the face of Delta’s emergence, the rally in bond yields would be weaker than in previous inflationary events.
“We believe the economic restart is real – but it is a restart, and will eventually taper back to the pre-COVID trend,” BlackRock said.
“We see nominal yields rising far less in response to inflation than during similar episodes in the past. Yet [we] still believe the direction of travel should be higher.”
