Daily Update – 17.05.2021

Inflation & monetary policy uncertainties weigh on markets

A decline in European stocks points to a weaker opening on Wall Street. Investors are weighing the risks of inflation continuing to rise and its impact on Fed monetary policy, as well as a spike in coronavirus cases in some parts of the world. After global markets partially recovered from sharp losses early last week, US stocks traded lower in US pre-market trading. Stocks in Asia were mixed as Taiwan faces hundreds of undetectable infections after a year of being one of the biggest success stories in containing COVID-19. US Treasury yields stabilized, and gold hit a new three-month high. Bitcoin also steadied after heavy losses on Sunday. The drama in bitcoin began after Elon Musk sent a tweet that raised questions about whether Tesla might have already sold its bitcoin stake. In a later tweet, Musk said Tesla continues to hold the bitcoin it bought in February.

Concerns are mounting that the Fed will withdraw its support sooner than expected to quell rising inflation, which has begun to weigh on global equities. The minutes of the latest FOMC meeting will be released on Wednesday and will be closely analyzed for any hints or discussion of accelerating price pressures, as well as indications of a timetable for reducing asset purchases. I do not expect the minutes to show any signs of a rate cut and for the Fed to remain accommodative until the labor market recovers to anywhere near pre-pandemic levels. However, last week clearly showed that inflation fears can quickly lead to sharp sell-offs and that the market remains very cautious. Nevertheless, I believe that strong fundamentals, including very positive corporate reports, and further easing in Europe will keep the markets stable (but mixed) this week.