Risk appetite remained strong with US equities at fresh record highs, due to relatively dovish comments from Fed Chair Powell
Global equity markets rose in the past week, with the MSCI ACWI up by 2.3% wow (+12% year-to-date). Developed Markets (+2.4% wow) overperformed their Emerging market peers (+1.3% wow), widening their year-to-date valuation gap to +6%. The 12-month forward Price to Earnings premium currently hovers at +40% (DM: 19.7x vs EM: 14.1x) versus a 15-year average premium of +27%.
The S&P500 recorded new all-time highs, on the back, inter alia, of Fed Chair Powell highlighting in recent commentary that the Fed is in no rush to tighten monetary policy. Positive developments vis-à-vis infrastructure spending contributed also to the upside. All told, the S&P500 increased by 2.7% wow (+14% ytd), with implied equity market volatility (VIX) at a 16-month low of 16%.
US Banks led the increase (+6.5% wow), with the successful 2021 supervisory stress test results, leading to the lifting of the temporary capital distribution restrictions (on dividends and share repurchases for institutions with over $100bn in total assets) which had been imposed due to the pandemic.
In the event, the results indicated that all of the 23 firms that participated in the stress test, have sufficient capital levels to absorb losses during a severely adverse economic scenario in which, inter alia, the unemployment rate rises to 10.8% in Q3:2022 (5.8% in May 2021) and real GDP declines by 4% from Q4:2020 to Q3:2022.
In the aforementioned scenario, the common equity tier 1 capital ratio, i.e. the ratio (mainly) of common shares and retained earnings to the total risk-weighted assets, would fall to 10.6% on aggregate, from an actual ratio of 13% in Q4:2020, well above a minimum requirement of 4.5%.
Regarding the US investment plans, the White House and a bipartisan group of Senators agreed on a framework for a deal on infrastructure spending. The size of that framework is $579 bn which, according to our estimates, corresponds to circa 55% of the size of the respective investment areas originally proposed under the Presidency’s American Jobs Plan.
On the revenue side, no concrete tax increase proposals were included, with the funding stemming mainly from enhanced tax enforcement and a reallocation of unused pandemic-related relief funds. Recall though, that despite the recent political mobility, a comprehensive bipartisan deal on the Presidency’s long term investment plans, remains very challenging.
On the other side of the Atlantic, the Bank of England (June 24th), despite a further improvement in its short-term economic outlook (see Economics), refrained from hinting at any change in the monetary policy, at least in the near future (Bank Rate: 0.1% | QE envelope of £895 bn, utilization of £825 bn as of June 23rd).
At the same time, euro area economic activity continued to pick up pace in June, as suggested by the latest forward indicators (see Economics). According to our estimates, real GDP will increase by +1.3% qoq in Q2 (+13% yoy), followed by +2.6% qoq (+3% yoy) in Q3, from -0.3% qoq in Q1. A gradually rising negative risk for the aforementioned outlook, is the spread of the highly contagious SARS-CoV-2 Delta variant and its potential repercussions, especially for the tourism industry.