Equity markets experienced a volatile month. The advancing Delta variant raised concerns about the recovery of global growth and weighed on investor confidence. Nonetheless, new records were set in Europe and in the US. The Chinese stock markets were caught by surprise by harsh regulatory measures taken by the government.
Our expert, Johan Gallopyn, analyses the market trends for July 2021.
Equity market trends: higher volatility, new record highs as well
In July, most stock markets once again recorded positive performances. The exception was the emerging markets and especially the Chinese stock exchanges due to the increasing control and regulation by China of companies in the technology and other sectors. Stock prices were more volatile than in recent months. In July, the European Stoxx600 experienced its largest one-day drop of the year (-2.3%). The S&P 500 contained the damage to -1.6%, its largest single-day decline since May. Uncertainty about the impact of the advancing Delta variant on the economic recovery triggered a temporary surge in risk aversion. This manifested itself in falling share prices, especially for the more cyclical values. Nonetheless, both the S&P 500 and the Stoxx600 recorded new historic records in the past month. Prices were supported by the publication of second quarter corporate results. After the record pace of upwards revisions of earnings forecasts during the quarter, the results published to date have exceeded even these high expectations.
In the emerging markets, Chinese equities suffered a sharp fall after investors were surprised by the Chinese government's crackdown on the private education sector. Companies in this sector were forced to transform themselves into non-profit companies, and foreign investment is no longer possible. The sell-off occurred in the wake of price declines in China technology stocks since the beginning of the year due to previous regulatory moves. These regulations are mostly aimed at companies listed offshore in the US or Hong Kong. The Hang Seng Index fell by more than 13% in July. Chinese A-shares (i.e. listed in mainland China) also suffered some contagion, with share prices falling by 8%.
Bond market trends: bond yields slip further
Concerns about the implications of the advancing Delta variant for the further development of the economic recovery were also reflected in the rising prices of “safe” bonds. US 10-year rates briefly dipped below 1.2% and German 10-year rates slipped back below -0.45%. This movement was amplified by some market participants who had anticipated a rise in interest rates and were consequently adjusting their positions. Current rates mark a rather steep decline from the highs of earlier this year of 1.75% for US rates and -0.10% for German rates. Within the eurozone, spreads widened slightly as German rates fell, but this was not fully mirrored by rates in the southern countries.
Uncertainty about the economic recovery led to higher risk aversion with respect to corporate bonds. Spreads widened for investment grade issuers, and especially for high-yield issuers.
Central banks: ECB to adopt symmetric inflation target
The European Central Bank (ECB) has announced the results of its strategic monetary policy review. The ECB will in future apply a symmetrical 2% target for inflation over the medium term. Until now, the objective has been to keep inflation close to but below 2%. By adopting this approach, the ECB has confirmed that monetary policy will tolerate a temporary period in which inflation is slightly above the target. Markets saw this as a strengthened commitment by the ECB to keep interest rates low.
The US Federal Reserve provided no new guidance on when it would start tapering the bond purchase programme. This leaves the market speculating as to whether the announcement will happen as soon as the central banker symposium in Jackson Hole at the end of August, or not until the following month.
The Chinese central bank has announced it will cut the reserve requirement ratio (RRR) by 0.5 percentage points for most banks. The PBOC cites technical reasons for lowering the RRR as well as to support the real economy and reduce financing costs, especially for small businesses. This announcement marks a shift in the central bank’s stance, but it is perhaps premature to expect any easing of monetary policy.
Currencies: few outliers
There were no significant movements in currencies during the past month. The trend of the strengthening US dollar was interrupted during the month by the Federal Reserve appearing to be in no hurry to begin tapering bond purchases and weaker-than-expected economic growth.
Emerging market currencies were generally weaker in July. The surging Delta variant may have a greater impact on economic activity in those countries, whose vaccination campaigns are often much less developed than in Western countries.
The volatility of bitcoin and other crypto currencies remained very high in July. The price of bitcoin briefly surged to USD 40,000 on reports that Tesla would eventually accept the cryptocurrency as a means of payment after further studying its environmental impact. Rumours that Amazon would also start accepting bitcoin were denied by the company.
After cancelling the meeting in early July, the members of OPEC+ were finally able to reach a compromise. A monthly production increase of 400,000 barrels per day from August to December was agreed. There were tensions over the demands of the United Arab Emirates to increase the base production level. In the end, an agreement was reached that the UAE could join Saudi Arabia, Russia, Kuwait and Iraq in producing an additional 1.6 million barrels from May 2022. Following an initial move higher (to USD 77 in early July) due to the failure to reach an agreement on additional production from August, the price of brent oil fell back below USD 70 per barrel when the agreement was struck. The oil price subsequently recovered again.
After brief weakness in June, industrial metals prices moved higher in July. Weaker demand from China was counterbalanced by the shift in tone by the Chinese central bank, while demand from the rest of the world is rebounding and Europe has confirmed that it is serious about its energy transition (Fit For 55 plan), which will support demand for industrial metals.
The gold price advanced after its sharp decline in June. In view of the risks of a slower recovery in growth caused by the Delta variant, central banks will be reluctant to tighten monetary policy quickly. The fall in US real interest rates below the Covid low helped support the gold price.
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