Stocks fall on rising economic and geopolitical uncertainties
With near-term visibility deteriorating and earnings season just around the corner, US stocks came under selling pressure last week with market indices posting their first weekly drop in over a month. Concerns about peaking earnings growth combined with higher inflationary pressures and slowing economic activity in China are some of the issues sighted as selling triggers. Although the Federal Reserve chairman reiterated his view that rising prices are transitory, more hawkish members of the board have expressed their concerns about rising labour costs and the need to begin tapering.
Although we retain our optimistic Q4 outlook for our own market in Japan and expect stocks to begin reacting positively later this quarter to what looks to be a strong earnings season, we are keeping a very close eye on global events, recent economic trends and the fluid situation with the pandemic (as underlined below) which could derail this scenario. Ever rising tensions between the US and China and potential for introduction of export controls which could severely impact Japanese firms, especially within technology segments remains another one of our key concerns.
More specific to Japan, the highly unpopular summer Olympics due to commence by the end of this week is yet another factor that has kept investors on the side-lines. Moreover, recent shortages of vaccines stemming from poorly organised distribution of jabs has also become a major worry which we think spells the end for Prime Minister Suga who is facing a leadership race in September and leaves his ruling party highly vulnerable ahead of the Lower House elections that must be held by October.
Covid’s potential mutation remains a major risk
From the last quarter of last year, we have speculated that mass inoculation programs in developed nations should help contain the Covid spread by late summer and help bring an end to the contagion in richer countries by the closing of this year. Now we are not so sure! With US hospitalisations rates among those hesitant to take their jabs rising significantly and now seen in the younger population, we are clearly seeing a growing sense urgency again among health officials and medical experts as vaccinations stall.
What is also clear is that Covid delta variant now prevalent in most countries is increasingly infecting those who are already vaccinated, although a very low percentage of those end up in hospitals or perish. One major concern is the UK, one of world’s major travel hubs which is seeing infections surge again to six-month highs and yet its government is removing most legal restrictions in the coming week, only days after hosting many of the UEFA Euro 2020 games which could yet prove to have been a super spreader event.
Given the high Covid inoculation rate in Britain, experts worry that a free roaming virus could mutate to become highly resistant to the current vaccines. Unless booster shots, specifically targeting the delta variant are developed, approved and administered soon, we could find ourselves battling yet another major contagion. The good news is that both Pfizer and Moderna are developing these jabs. The bad news is that some politicians are accusing these drug makers of profiteering and complicating the roll-out of vaccines in poorer nations by suggesting a third jab.