The stock market pulled a remarkable turnaround today, shaking off yesterday’s declines with the S&P 500 (SPY) rocketing to another record intraday high, led by the financial and energy sectors, which had been lagging as of late and continued strength in mega-cap tech stocks. It seems that after a brief flare-up of concerns regarding the coronavirus delta variant and a potential acceleration of the timeline to taper quantitative easing in the US, fears have greatly tempered. At the time of writing, the Dow Jones (DIA) rose 1.27% while the Nasdaq (QQQ) rose 0.6% and is very slightly below it’s all-time high. The Russell 2000 (IWM), which tracks the performance of small-caps, led the day, rising more than 2%.
In recent weeks, market participants are increasingly trying to gauge if the surge we are seeing in the more contagious coronavirus delta variant will weigh on global growth rates. Yesterday, it seems concerns came to a head after the Japanese government made a last minute announcement that a state of emergency would be re-instituted across Tokyo and that all events would take place behind closed doors, with no spectators, walking back an earlier decision to allow locals to attend the games. The state of emergency will begin on Monday and run through Aug. 22, while the games are scheduled from July 23 to Aug. 8. On Wednesday, 16 days before the Opening Ceremony, the Tokyo Metropolitan Government reported 920 COVID cases, over 200 more than any other single-day total since May. On Thursday, it reported 896, the second-highest count since May. Other countries, like India and Brazil, are also dealing with an extremely worrying surge of cases. Even in the US, where roughly 50% of those eligible are fully vaccinated, the country is seeing a small surge in cases recently, with the delta variant accounting for 51.7% of all new infections, according to the CDC. According to reports, as of yesterday, only 16.8% of the Japanese population was vaccinated against the virus.
In other news, in another move that raised concerns about the global growth rate, China’s central bank signalled it will be cutting the amount of cash that banks must hold in reserve, a move that suggests the economic recovery in China may be slowing down. The People’s Bank of China (PBOC) will reduce the reserve requirement ratio by 0.5 percentage points for most banks, according to a statement published Friday. That will unleash about 1 trillion yuan ($154 billion) of long-term liquidity into the economy and will be effective on July 15, the central bank said. The reduction was signaled earlier this week, when the State Council, China’s equivalent of a cabinet, hinted the central bank would make more liquidity available to banks so they could lend to smaller firms hurt by rising costs. The timing and magnitude of the move, coming a week before second-quarter growth data, suggests worries about the economy’s outlook and was a decisive shift away from policy tightening, which most, if not all, recovering economies are pursuing.
Ken Cheung, Chief Asian Foreign Exchange Strategist at Mizuho, said “The PBOC came in broader and sooner than expected, highlighting the policy urgency to support the Chinese economy. Such firm easing measures could further fuel concern over China’s growth outlook in the second half as well as the upcoming Q2 GDP figures in the coming week”. Just to put into more familiar terms, this would be like if the Federal Reserve suddenly turned around and said rather than discussing tapering quantitative easing, it would instead propose pumping more money into the economy.
While these global concerns did jitter the market yesterday, the impressive recovery in US equities underscores the remarkable strength of its economy, as the country continues reopening thanks to effective distribution of the vaccine, with 48% of the population fully vaccinated, according to the CDC. In my opinion, while the delta variant does pose a risk to global growth rates, and the market may react negatively to headlines about it, the foundations of the recovery in the US (i.e nation-wide reopening measures, a rapidly improving labor market, record earnings from companies, and a high level of savings among Americans) are very strong and will continue to underpin a bull market here.