Massive pandemic-relief fiscal spending, the progress with vaccination programs, and the low-interest rate environment have been boosting financial assets around the world, despite the recent spike in inflation and commodities prices.
Global stock markets have performed very strongly in the first half of 2021, with the S&P 500 index soaring more than 40% so far and almost 100% since March 2020 lows, led by gains in value and cyclical stocks.
However, as financial markets post fresh record highs, new market risks are arising ahead of the second half of the year, which could hurt the market’s risk appetite.
Investors are concerned about the rapid spread of the highly contagious Delta coronavirus variant, which has been responsible for the rise in cases in Asia, Britain and Europe.
Sydney, Australia's most densely populated city, fell into a fresh lockdown, while some new restrictions have been announced in Indonesia, Malaysia and Thailand last week.
Market participants are also concerned about when and how the central banks will begin tapering their accommodative monetary policies, given the lofty asset valuations which heavily rely on cheap liquidity.
The Federal Reserve has already raised its inflation expectations and has indicated two interest rate hikes for 2023 as the US economy recovers faster than expected from the pandemic-induced recession.
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