Macroscope | As the Delta variant rages, is the market too fearless for its own good?
- Market anxiety has swung sharply between angst over the Delta variant and worries that the Fed is falling behind in removing policy accommodation
- More worryingly, even with bonds and equities dangerously overvalued, investors still think they can have their cake and eat it
Financial markets are prone to schizophrenic-like behaviour. Sentiment can be quite bullish even when investors are worried about the state of the economy.
Ever since the world’s leading central banks began intervening heavily in markets in response to the 2008 financial crisis, distorting asset prices, the mood music has been increasingly perplexing.
The Covid-19 pandemic – which has wreaked havoc on the global economy while unleashing unprecedented monetary and fiscal stimulus – has made the determinants of sentiment even harder to fathom.
Even as the recovery has taken hold, market behaviour has been erratic. One week, investors are concerned about a virus-induced slowdown, the next they are fearful that a prolonged surge in inflation will lead to an earlier-than-anticipated withdrawal of stimulus.
