What is the cause behind recent spikes of volatility in the stock market?

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Without any doubt, an increase in cases of Delta strain of coronavirus has played an important role in investors’ sentiment. Despite the fact that it is very unlikely that we will see full lockdowns and stay-at-home orders, the market is clearly scared that a worsening of the epidemiological situation could negatively affect countries’ recovery.

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The Japanese government, for instance, has been forced to reintroduce an emergency regime in Tokyo from July 12 to August 22. Long story short, this means that Japan will host the Tokyo Olympics without spectators. The lack of fans at the stadiums in the capital will likely mean that the organizers will need taxpayer help to get the money back to the ticket holders. Thus, there is a high probability in the upcoming meeting central bank will revise its GDP forecast.

Howbeit, the good news is that even if currently available vaccines may not be that efficient against a new variant of Covid, the hospitalizations don’t go up dramatically, as well as an overall level of mortality. Considering the fact that the number of new strains of Covid will continue to rise, it could take some time for Central Banks to start the tapering process.

The only problem is that inflationary pressures are also growing. Nordea analysts expect that US core inflation could reach 4% in June with risks to the upside. They believe that we will continue to see peculiar growth in a few components, such as used cars, airline fares, accommodation, and rental cars. Prices (core) are likely to accelerate until ultimo Q3. The Wall Street Journal survey also suggests that Americans should brace themselves for several years of higher inflation than they’ve seen in decades. Any signs that inflation may be more resilient than previously thought could allay expectations that the Fed might pull out of the current pandemic-era stimulus earlier by supporting the dollar against other major currencies.

It should be noted that according to the latest Fed meeting minutes, the “reduction” in QE may start earlier than expected, given the more favorable economic outlook, underpinned by the rapid rollout of vaccinations in the US; but conditions are not yet fully ripe. In the meantime, the FED has slowed down the purchase of corporate bonds through the smccf mechanism to $ 200 billion from $300 billion. A day later, the Federal Reserve Bank of New York today announced that the Secondary Market Corporate Credit Facility (SMCCF) will begin gradual sales of its corporate bond holdings on July 12, 2021.

How does gold react? Gold strengthened slightly amid COVID risks, slowing economic growth and uncertainty in the oil market. The effect of the decline in real yields supports gold, despite the strengthening of the dollar.

 

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