Warning signs of a global recovery as Delta darkens outlook

LONDON, July 21 (Reuters) – Weaker global stock markets and a huge flight to safety in US Treasuries this week suggest investors are now skeptical that a much-anticipated return to post-COVID normalcy is achievable anytime soon.

Data from the United States and China, which account for more than half of global growth, suggests a slowdown in the recent rapid pace of the global economy along with rising prices of all kinds of goods and commodities.

Coinciding with a resurgence of the Delta variant of COVID-19, markets could send red flags about the global economic outlook, George Saravelos, chief currency strategist at Deutsche Bank, told clients.

“As prices have increased, the consumer has reduced demand rather than pushing consumption forward. This is the opposite of what one would expect if the environment was truly inflationary and it shows that the economy world has a very low speed limit, ”wrote Saravelos. .

This sentiment was also evident in the latest feed data. Bank of America Merill Lynch reported concerns of “stagflation” for the second half of 2021, noting a slowdown in equity inflows and high yield asset outflows.


Hedge fund weekly currency positioning data is the closest available real-time indicator to investor thinking about the $ 6.6 trillion per day forex markets.

With the dollar at its highest since the end of March, the latest data from the Commodity Futures Trading Commission shows that net long positions in the dollar against a basket of major currencies are the most important since March 2020. Positioning had fallen to a short net bet at the beginning of June. .

The appreciation of the dollar against the euro and emerging market currencies is not surprising given the economic uncertainty, said Ludovic Colin, senior portfolio manager at Vontobel Asset Management.

“Whenever Americans are worried about national or global growth, they bring home money and buy dollars,” he added.


In recent months, investors optimistic about an economic recovery have sent a flood of liquidity into so-called cyclical sectors such as banking, leisure and energy. In short, they are companies that are benefiting from an economic recovery.

The tide can now come down.

Instead, “growth” stocks, especially tech, have outperformed their value counterparts by more than 3 percentage points since early July. Many Goldman Sachs clients believe the cyclical rotation was a short-lived phenomenon driven by the recovery from an unusual recession, the bank said.

Defensive stocks such as utilities are also making a comeback. A basket of value stocks compiled by MSCI is testing its lowest levels for this year against its defensive peers, having risen 11% in the first six months of 2021.


Earlier this year, the dollar’s path was determined by the interest rate differentials that US debt enjoys against its rivals, with correlation spikes in May.

While US real or inflation-adjusted yields are still higher than their German counterparts, the decline in US nominal yields below 1.2% this week has raised concerns about the outlook for global growth.

Ulrich Leuchtmann, head of foreign exchange at Commerzbank, said if global production and consumption did not return to 2019 levels soon, then one had to assume a permanently lower GDP path. This is reflected to some extent in the bond markets.


Investor sentiment has become more cautious, according to weekly polls from the American Association of Individual Investors. BlackRock, the world’s largest investment manager, cut US equities to neutral in its mid-year outlook.

Stephen Jen, who heads hedge fund Eurizon SLJ Capital, noted that because China’s economic cycle was ahead of that of the United States or Europe, weaker data is trickling down Western investor sentiment. .


Popular reflation trades in commodities markets have also reversed. The gold / copper price ratio fell 10% after peaking more than 6.5 years in May.

Reporting by Ritvik Carvalho and Saikat Chatterjee; Editing by Sujata Rao and Alison Williams

Our Standards: Thomson Reuters Trust Principles.

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