Early gains fizzle out

It’s been an interesting start to the week as equity markets made strong gains early in the day before giving most back as the morning wore on.

US futures had a similar experience and are now treading water ahead of the open on Wall Street. What’s interesting about the moves is how happy investors are to turn a blind eye to a growing list of risks for the economy and markets.

In the space of a week, Evergrande has gone from being viewed as a potential Chinese Lehman moment to seemingly being nothing to be concerned about. In that time, one deal was reached with onshore bondholders, while an USD 83.5 million offshore coupon payment was missed without explanation and another USD 45 million is due to be paid this week.

Policymakers are continuing to grapple with rising inflation which is both higher and potentially less transitory than previously anticipated. An energy crisis isn’t likely to ease those concerns, with households and businesses facing higher bills and input costs, which could exacerbate the issue further and make life very uncomfortable for central banks.

Thankfully, we’ll hear the views of many policymakers from a number of central banks this week who will no doubt be keen to reassure investors. ECB President Christine Lagarde got the week underway and stated that the view remains that the inflation upswing is “largely transitory” and while there are some factors that could lead to stronger price pressures, the baseline scenario remains that it will remain below target over the medium term.
Fed policymakers Lael Brainard, John Williams and Neel Kashkari are all due to speak today. All err more on the dovish side typically so it will be interesting to hear their views on the recent trends and whether they support the plan to taper this year.

Charles Evans has already aired his views today and they seemingly align with what the central bank put out last week, that conditions will soon be met for tapering. Interestingly though, he claimed that he’s more uneasy about not generating enough inflation in 2023 and 2024 than living with too much now. Fed policy makers will be busy this week so there’ll be no shortage of views to get stuck into.