There is no fundamental case justifying the drop in yields and equities – UBS

FXStreet reports that economists at UBS do not think the fundamental case for lower yields is convincing – they think technical factors have pushed yields down. 

“We do not expect Delta or other variants to disrupt the economic recovery in developed markets, although there is scope for a modest delay. The impact of the Delta variant depends on the level and speed of vaccinations, the reliance on m-RNA vaccines, and current immunity levels. On balance by those metrics, the US and Europe should be less vulnerable to reopening delays than select parts of Asia and Latin America.”

“Market concerns and pricing are running ahead of likely Fed policy change. A tightening in Fed policy is contingent on economic conditions improving. On inflation, the Fed believes that inflation will ease as pandemic-related disruptions clear and base effects dissipate. In our view, tapering plans should be outlined by the end of the year, but only start next year, and a rate hike should only follow in 2023, compared with market pricing for the second half of 2022.”

“We view the move in yields as being driven largely by temporary technical factors and maintain a risk-on view. We expect yields to resume their rise and reach 2% by the end of the year as the US economy fully reopens, the labor market continues to improve, and the Fed shifts towards tapering.”