More supply chain disruptions look imminent while Japan’s Covid now out of control

Stock markets edge higher while the world burns
US stocks continued to edge higher by ever narrowing group of market leaders while some segments of the market, namely semiconductors were sold off on rising concerns of the weakening end-demand from devices that had benefited from stay-at-home trends during past lockdowns. As expected, our market in Japan has also recovered from its recent lows, supported by strong earnings season, staying in the trading range of the past six months as the holding pattern continues. 

As we have noted in the last few weeks, spreading natural disasters of wildfires and floods and the growing contagion of Covid delta variant are looking to further disrupt global supply chains, raising inflationary expectations beyond what many economists had thought would prove very transitory. In the meantime, faster recovery in US employment numbers and rising wage inflation have led to more Federal Reserve board members calling for tapering QE operations before the year-end which will remove one major pillar of support for continued rise in asset prices. 

With lockdowns having come to an end in the West, vaccination and mask mandates look to have once again become critical in containing the Covid spread. Although most Covid vaccines have proven highly effective in keeping the number of fatalities low compared with previous waves, emergence of new variants such as B.1.621 strain which we highlighted last week as having proven fatal among the vaccinated elderly in Europe and has been identified in 10% of cases in Miami are causing more anxieties among medical experts. 

Ghost of Olympics to haunt the Japanese government 
Although the heavily restricted movements, vigorous testing and banning of spectators during the Olympic games look to have diminished much of the direct risks linked to a super-spreader event, the impact of holding the games during the time when Japan had declared a state of emergency is proving to have been disastrous. It is clear now that stay-at-home directives were largely ignored as the nation celebrated the huge success of Japanese athletes in the medal rankings in the country’s bars and restaurants. 

With Japan’s virus experts declaring last week that the Covid situation is now “out of control”, and the government currently having no political will to enforce a stricter lock-down, especially ahead of ruling party’s leadership race next month and the Lower House election by end of October, hopes that the hugely unpopular summer games will gradually be viewed in a more positive light has been severely dashed. Japan’s PM, Suga-san, whom we have long been expecting to step down this year now looks doomed with his support in the latest polls plunging even further. 

The good news is that Japan’s daily vaccination rates remain at relatively high levels with over 1.2mn receiving their jabs. So, although less than 40% of the population is currently fully vaccinated, with 1% of them being inoculated daily, Japan should reach adequate levels of protection by end of October while the government seems to be pushing hard for regulatory approvals to vaccinate children. Better late than never!