August 2021 / MULTI-ASSET SOLUTIONS
PULSe Indicator: Sentiment and Economic Uncertainty Rule in Q2
Inflation and central banks dominate markets, outweigh new coronavirus variants.
- In the June quarter, the PULSe indicator decreased. Improvements in the Pandemic, Liquidity, and Sentiment factors outweighed a deterioration in Uncertainty.
- The Sentiment factor oscillated between the crisis zone and the complacency zone, driven by inflation news and Fed discussions.
- Despite improving over the quarter, June saw a reversal. PULSe rose moderately due to a deterioration in the Uncertainty, Liquidity, and Sentiment factors.
PULSe is a composite indicator that is designed to monitor the state of global financial markets since the coronavirus crisis. It stands for Pandemic, Uncertainty, Liquidity, and Sentiment—four factors that we believe encompass much of the market’s dynamics. High positive values of PULSe are typically a negative sign for market stability.1
The PULSe composite indicator rose in June and was characterized as Stable as of the end of the month.
- The Pandemic factor remained largely unchanged over the past month as improvements in Germany, Italy, and China made up for the spread of the Delta variant in the U.S. and UK.
- The Uncertainty factor rose as the U.S. oil rig count showed signs of peaking, copper prices dropped, long‑term government bond yields declined, and the upward revision of earnings forecasts slowed down. Economic Uncertainty had been flirting with the elevated zone.
- The Liquidity factor also shot up as the U.S. three‑month commercial paper spread widened.
- The Sentiment factor moved higher as carry currencies underperformed safe currencies and the gold/copper price ratio increased.
In this note, we highlight three factors that contributed meaningfully to the PULSe indicator over the last month of the June quarter: The new virus wave continued to spread in the UK, copper prices dropped, and the equity put/call ratio declined.
Visualizing the PULSe Indicator
(Fig. 1) Expressed as an average of the four component indicators
Radar Chart Showing the PULSe Indicator and Its Components
(Fig. 2) Radial axes expressed as z‑scores (number of standard deviations from the mean)
The Four Components of PULSe
(Fig. 3) Currently only Liquidity is elevated
1. The new Delta variant is dominating in the UK
In the current Pandemic factor model, we look at three key metrics: (1) daily new cases to track the spread of the COVID‑19 virus, (2) positive testing ratios to confirm the trend of the diffusion curves, and (3) Google retail mobility data to assess the ongoing impact of the pandemic on consumer behavior.
Earlier than most developed markets, the UK confronted the Delta variant, which combines notably higher transmissibility and the ability to escape immune responses compared with the earlier strains. As a result of the reduced efficacy rate against infections, in June the level of daily new cases in the UK rose to 10x the previous lows despite the country’s high vaccination rate. In mid‑June, UK Prime Minister Boris Johnson delayed a full reopening of society in England, which had been slated for June 21, for another month, saying that the vaccination campaign would be accelerated. The UK Google retail mobility data had been abating since then.
However, it’s comforting to see that both the hospitalization rate and the death rate continue to fall, reflecting promising effectiveness of existing vaccines against severe symptoms. Early data suggest that most vaccines (mRNA, viral vector, and inactivated) should still provide roughly 90% protection against hospitalization. Hence, the pandemic news hasn’t been driving the market volatility as much as it did in most of 2020.
We are likely to continue to witness new variants emerging as vaccines race against virus mutations. The ability of the next‑generation variant to escape immune responses is the key to watch, as it affects whether vaccines can still protect us from the disease.
Rising New Cases in UK Threaten Retail Mobility
(Fig. 4) UK Google retail mobility data and daily new cases
2. Copper prices are on a downward trajectory
The price of copper is a measure of global infrastructure investment and activity levels, especially in China. After hitting a historical high price in early May, copper prices have been on a downtrend amid concerns about “peak” economic growth and China strengthening controls on commodity prices in its 14th Five‑Year Plan for 2021–2025 to address abnormal price fluctuations and inflation pressure. This indicates higher economic uncertainty for our PULSe indicator.
Although copper is increasingly cited as a key ingredient within the sustainable infrastructure plans that are being announced globally, our metals and mining team thinks that the downward trend in copper prices may continue. They believe the commodity experience in 2020–2021 was driven by massive liquidity, a V‑shaped demand recovery, and a period of low capex/DDA.2 These trends are likely to diminish in 2022 as monetary and fiscal stimuli suffer harder comparisons, demand growth decelerates, and the aforementioned capital investment starts to come through.
A Drop in Copper Prices Indicates Increasing Economic Uncertainty
(Fig. 5) Copper prices (USD per tonne)
A Drop in the Put/Call Ratio Indicates Improving Market Sentiment
(Fig. 6) Equity put/call ratio (five‑day moving average)
3. The equity put/call ratio has declined
Since the U.S. Labor Department reported the surprise April consumer prices hike in mid‑May, the S&P 500 put/call ratio had been abating, reflecting a drop in the demand for hedging and the recovery of investor confidence. However, the ratio was pushed higher again after the Fed policy meeting on June 16, as policymakers acknowledged that progress on vaccinations had allowed the economic recovery from the pandemic to gain strength and Fed officials began to discuss slowing the central bank’s bond purchases, the first step toward eventually raising interest rates. Fed Chair Jerome Powell said that observers could characterize the meeting as “talking about talking about tapering.” Later in the month, the equity put/call ratio returned to a downward trend, as investors continued to digest dovish remarks from Powell as he downplayed inflation as well as comments from New York Federal Reserve President John Williams, who stated that a rate hike is “way off in the future.”
T. Rowe Price Chief U.S. Economist Alan Levenson believes that we’re likely to get “advance notice” by the September 22 Federal Open Market Committee meeting that a taper announcement is coming, with the decision itself communicated on December 18. In the meantime, inflation and Fed discussions will likely continue to drive market volatility.
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