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Best of the Web - August '21

Executive Summary

The month of August saw the adverse effects caused by the spread of the Delta Variant battering the global economy which was just starting to see a full recovery. The two biggest economies - US and China are already taking a hit.

How has the Delta variant affected the global economy?

Signs of a slowdown in the recovery of the global economy are becoming more visible as the more transmissible Delta variant rages on despite ongoing vaccination programs. Global cases are currently at 212mn and deaths are now at 4.43mn.

US growth forecast lowered to 6%: Goldman Sachs Group Inc has lowered their forecast for US Economic growth from 6.4% to 6% citing the spread of the Delta variant which they say is bigger than initially anticipated and could cause major supply chain disruption and high inflation. However, they have boosted their 2022 forecast to 4.5% from 4.4%.

China is finding it more challenging to maintain its pace of economic recovery: Recent Covid-19 outbreaks in China has been deemed far more serious than what it was in early 2020. This is adding on to issues with credit and business investment, and risks slowing down what was considered an impressive early rebound of economic activity. Both manufacturing and retail sales have weakened dramatically, putting questions on what the shape of a country’s medium term recovery might look like.

Global supply is on the brink due to fresh Covid-19 surges: The fast spreading Delta variant has hit a series of factories and ports in Asia compounding supply chain blockages across the world. Around 42% of global exports are sourced in Asia according to the UN. To make matters worse shipments would usually need to increase around this time for the Christmas holiday season.

How are countries responding to rising inflation?

Countries have varied in policy when it comes to dealing with inflation, most do not yet want to take a leap to tighten monetary policy until substantial post pandemic economic recovery has been realized.

The Federal Reserve is likely to hint a potential cutback in asset purchases: Federal Reserve Chair Jerome Powell is expected to hint at an eventual reduction of asset purchases currently consisting of about $120 billion despite initially pledging to keep up that buying pace until substantial further progress had been made toward its goals of maximum employment and 2% inflation.

The ECB has said it is accommodative to higher inflation: The European Central Bank has said that it won’t increase interest rates even if inflation rises and that they are willing to live with higher inflation. The inflation target has also been raised to 2%. This is contrary to the belief some analysts had, that the ECB will cut down on stimulus and go in for a rate hike as inflation in the Euro started hovering just below 2%.

The RBI is to resume rate hikes citing high inflation: The Reserve Bank of India will look to increase rates starting from the first half of 2022 as inflation remains high in India despite the impacts of the Delta variant. Retail inflation for July however stood lower than the previous two months which were above RBI's upper tolerance band of 6 per cent due to accommodative policies that have led to easy liquidity conditions in the recent past.

How have commodities been performing?

Oil prices fall to lowest in 3 months:

Oil prices started at $75.14 per barrel on the 1st of August falling to a 3 month low of $64.97 a barrel by the 21st of August after the US dollar strengthened on concern that the global economic recovery might slow and the Federal Reserve’s signals that it will scale back stimulus measures.

Gold prices fall sharply and then rise again:

Gold prices fell sharply to $1722.80 an ounce by the 10th of August rising again to $1789.35 an ounce by the 23rd of August. According to experts, the rise in gold prices were directly impacted by sentiments getting dented by growing concerns globally over the possible negative economic impact of the impending Delta variant.


Top 5

Specter of Stagflation Hangs Over Emerging Markets

While advanced economies argue about whether the combination of aggressive fiscal stimulus and a relatively rapid economic recovery will generate inflation in their countries, that inflation has already reached the developing world in the form of rapidly rising global commodity prices, including food. Worse, several emerging markets now face the much more serious threat of stagflation.

The US economy might've reached peak recovery

Recent economic data suggests the US recovery is slowing from the rapid pace of early summer. Americans are spending less, unemployment filings are flatlining, and confidence in the recovery plummeted in August. Americans are bracing for a slower rebound as the Delta variant sends case counts skyrocketing.

China economy under pressure as factory output, retail sales growth slow sharply

China's factory output and retail sales growth slowed sharply and missed expectations in July, as new COVID-19 outbreaks and floods disrupted business operations, adding to signs the economic recovery is losing momentum. China's economy has rebounded to its pre-pandemic growth levels, but the expansion is losing steam as businesses grapple with higher costs and supply bottlenecks.

Treasury Yields’ Grip on Emerging Markets Keeps Traders on Guard

Slowing economic recovery amid a resurgent pandemic is leaving emerging-market currencies vulnerable to a selloff if Treasury yields rise again. While the influence of U.S. borrowing costs on developing-nation currencies has waned in recent months, it may return to prominence for riskier assets as the cushioning effects from China’s growth rebound and low inflation weaken.

The cost of saving the global economy: US$834M an hour

According to strategists at the Bank of America, central banks have spent approximately US$ 834 mn an hour for 18 months to keep companies afloat during the pandemic. For investors, the big question is how much longer can central banks keep the cash spigots flowing at full force. At the Fed’s last meeting, most policy makers agreed the tapering could start later this year.

Compiled by: Emaad Rizwan

Disclaimer: This information has been compiled from sources believed to be reliable but Frontier Research Private Limited does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment as of the date of the material and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned herein may not be suitable to all investors.


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