Stocks and oil rallied on Monday on bargain-buying after last week’s blow-out, with traders tracking a healthy Wall Street performance fuelled by comments from a top Federal Reserve official that the spread of the Delta variant could cause him to reconsider plans to taper monetary policy.
Fears about the Covid mutation have rattled world markets as it forces some governments to reimpose containment measures, while sentiment was jolted further last week by minutes from the Fed’s July meeting indicating it could start withdrawing its vast financial support by year end. The colossal bond-buying programme and record low interest rates have been a key pillar of the global recovery for more than a year, and the prospect of the cash being withdrawn has seen that advance stall.
However, Dallas Federal Reserve Boss Bob Kaplan, who is considered a policy hawk, suggested he could rethink his view to taper soon in light of the Delta variant’s spread, which is showing signs of hobbling economic growth.
“The thing that I am going to be watching very carefully over the next month, before the next (Fed) meeting, is (whether) it is having a more material impact on slowing demand and slowing GDP growth,” he said.
“I’m going to keep an open mind on that, and if it is having a more negative effect that might cause me to adjust my views somewhat from ones that I’ve stated.” Observers said the general consensus is that even when the Fed finishes winding back support, it is unlikely to immediately start hiking interest rates.
“Markets react to interest-rate hikes much more than tapering and we expect a pause between tapering and the first hike, suggesting liftoff in 2023 and not before,” said Esty Dwek of Natixis Investment Managers. Focus is now on Fed Chief Jerome Powell’s speech to the Jackson Hole annual conference of central bankers and finance chiefs, with hopes for a clue about a taper timetable. All three main indexes on Wall Street rallied on Friday, and Asia picked up the baton at the start of the week.
Hong Kong, which sank nearly six percent last week, climbed more than two percent, as did Taipei, while Tokyo, Shanghai, Seoul and Wellington put on more than one percent. There were also gains in Sydney, Singapore, Manila and Jakarta. The positive start was mirrored in oil markets, with both main contracts enjoying big gains, having suffered heavy losses recently owing to concerns that the Delta spread will impact demand as countries restrict people’s movements.
Crude was also helped by a dip in the dollar caused by the Kaplan remarks.
Still, while the week has got off to a healthy start, investors remain cautious about Delta’s effect on the recovery outlook, while China’s ongoing regulatory clampdown is also keeping optimism on check.