A long hot summer?

While investors can potentially enjoy another summer of low interest rates, uncertainties remain.

Children jumping

As summers go, it’s been a hot start (and we are not just talking about the weather). June has already seen lots of activity that could have potentially had a negative effect on stock markets, such as annual prices of goods and services rising strongly as a result of the economic recovery, or another foray by the Chinese military into Taiwanese air space.

Yet, the fact that stock markets have managed to absorb so much news, and investors stay relatively calm so far, is perhaps surprising. Clearly the key question continuing to occupy investors’ minds is whether the generous amounts of relief being handed out by the authorities in response to the pandemic will continue, or whether the authorities will rein back on them.

On that subject, perhaps the most important event this week was the gathering of officials at the US Federal Reserve meeting. The meetings of this body, which sets interest rates in the US, are very closely watched by investors as their actions typically impact economies around the world.

The main conclusion of the meeting was that as a result of the speed of the global recovery from the coronavirus, interest rates were now likely to rise sooner than investors were expecting. Back in March, the US Federal Reserve suggested interest rates would not rise until 2024. But strong economic data and the speed of the vaccination roll-out in the US, Europe and elsewhere have put upward pressure on the prices of goods and services which are rising at a rapid rate, making it difficult for both consumers and businesses. Authorities typically use higher interest rates to slow annual price rises (otherwise known as inflation).

Furthermore, the clock is now counting down to the time when the US Federal Reserve will likely announce that it is time to rein back its generosity – it has been pumping money into the economy as well as keeping interest rates low. Many investors believe this could happen as early as September.

For now, given that interest rates remain low and central banks are still in generous mood, we believe investors can remain relatively calm. But further on in the year, we see potential sticking points.

Stock markets have done very well since the start of the year, with company share prices now looking expensive from a historic perspective. Bubbles have also appeared in certain areas of the market, most notably in cryptocurrencies such as Bitcoin. So-called speculative bubbles are when investors cause a sudden spike in the share prices of certain companies, goods or currencies without paying due attention to their value. Another worry may be that the Chinese authorities are taking steps to dampen the rate of economic expansion in their country as they believe borrowing has risen too far and too fast since the onset of the pandemic.

So, while investors can potentially enjoy another summer of low interest rates and generous relief packages, some uncertainty could be introduced this autumn, along with the onset of shorter days and cooler nights.