Equity markets remained positively oriented in August. New records were set in both the US and Europe during the month. Chinese stock exchanges again experienced difficulties on account of new regulatory measures.
Our expert, Johan Gallopyn, analyses the market trends for August 2021.
August was a positive month for the equity markets. For the European (Stoxx600) and American (S&P 500 in US dollars) markets, this marked the seventh consecutive month of positive performance. However, the continued spread of the Delta variant weighed on stock market sentiment, reflecting fears of slower economic recovery. Weaker growth figures in a range of activity indicators in China contributed to the more uncertain economic environment. Investors also became slightly more risk-averse during the month due to the possibility of a slightly faster-than-expected start to the US Federal Reserve's tapering of its bond purchase program. At the same time, however, stock markets were supported by the publication of excellent company results for the second quarter in both Europe and the US. At the index level, the sharpest increase since 2009 was recorded for both earnings and revenue, reflecting the relatively low comparative base last year and the recovery inactivity. Companies are also signaling increases in dividend payments and/or share buy-backs. Progress was also made in the US on the USD 1,000 billion infrastructure investment plan (approved in the Senate with the support of certain Republicans) and on the USD 3,500 billion social infrastructure plan, where there was greater agreement within the Democratic party. The ‘buy on dips’ principle continues to apply to the stock markets for the time being.
Geographically, stock market performance was fairly similar for the major regions, although the US stock market was boosted in the second half of the month by the strong performance of growth stocks. However, after the steep decline in July, Chinese stock markets continued to struggle. A new data protection law suggests that the wave of regulation in China is continuing. The data protection measure had a particularly negative impact on technology stocks.
Bond market trends: limited increases in yields
US 10-year yields moved up about 20 basis points to 1.37% at the beginning of last month following the publication of the excellent July employment report. After that, investor uncertainty increased. They sought the haven of government bonds and pushed US 10-year bond yields down another ten basis points to 1.25%. The uncertainty was the result of doubts about the growth outlook due to the increasing number of Covid infections worldwide and the Federal Reserve’s report that suggested that it would be appropriate to start winding down its bond-buying program somewhat earlier than anticipated. German 10-year yields moved higher in the final days of the month following the publication of higher-than-expected inflation figures in the eurozone, although this was partly due to one-off factors. The spreads of the southern countries of the eurozone remained stable in the past month.
Corporate bond spreads initially moved slightly higher on fears of a growth slowdown, but then recovered fully to end the month unchanged.
Central banks: Federal Reserve to start tapering, possibly this year
The minutes of the most recent meeting in July showed some dissension among Federal Reserve members. According to the minutes, “most participants” favor starting the tapering of the bond purchase program (currently USD 120 billion per month) from the end of this year, while “several others” confirmed their preference for the beginning of 2022. The market interpreted this as a less accommodative stance than before, but this was again somewhat mitigated by comments from Fed Chairman Powell at the Jackson Hole symposium for central bankers. Nevertheless, the market expects the Fed to announce its tapering plans in September and to start tapering asset purchases in the fourth quarter.
The Norwegian central bank maintained its policy rate at 0% as expected, but confirmed that it would most likely raise the policy rate in September. It referred to the normalization of economic activity and the risks of leaving interest rates low for too long (financial imbalances).
The New Zealand central bank postponed the interest rate hike expected in August because of new lockdowns due to rising covid infections. It is now expected that there will be an interest rate increase in October.
Following the lowering of the required reserve ratio (RRR) in July, comments from the Chinese central bank continue to suggest that the loosening of monetary policy is possible soon, if not likely. The statement came after it emerged that lending in July grew at the slowest pace since February 2020.
Currencies: central banks and commodities set the tone
The dollar strengthened during the month to 1.17 against the euro, the highest level of the year. The dollar benefited from strong employment figures for July published at the beginning of last month and from increased uncertainty on the financial markets regarding the growth outlook. The dollar also found support in the somewhat earlier timing of the start of tapering, but then had to give up most of its gains following Powell’s softer comments in Jackson Hole.
The New Zealand dollar and the Norwegian krone were bolstered by the prospect of higher interest rates, despite a temporary drop in commodities and oil prices during the month, and despite the reintroduction of lockdown in New Zealand.
Emerging market currencies were broadly stronger in August, thanks to the weaker dollar in the second half of the month and increased risk appetite. However, some volatility was seen in currencies that are sensitive to commodity price fluctuations (such as the South African rand and Brazilian real).
Cryptocurrencies strengthened in August. The digital currency Bitcoin reached USD 50,000 after falling to USD 30,000 in July.
Commodities: prices drop on fears of growth slowdown
Fears of slower growth due to the Delta variant and slower growth in China were also felt through the fall in several commodity prices, including oil and industrial metals. The International Energy Agency lowered its estimate of global oil demand growth by 550,000 barrels per day, citing the impact of the virus. The oil price fell to USD 65 per barrel during the month, compared to USD 75 at the beginning of August.
Metals such as copper and iron ore lost some ground but were able to recoup some of their losses towards the end of the month. The price of aluminum was an exception to the trend, reaching its highest level in 10 years in August. Like most other industrial metals, aluminum is continuing its upward trend of the past year due to the recovery of demand after the pandemic. Aluminum prices have now been pushed up by possible production cuts in China, where the government is tightening oversight of heavily polluting industries to meet its climate targets. However, Beijing has warned against speculation on the commodities markets and is seeking to quell rising prices by putting strategic metal stocks on the market.
The gold price closed unchanged for August but experienced considerable volatility during the month. During the first half of the month, gold fell to just above USD 1,700 per ounce after a strong US employment report led to higher bond yields and a stronger dollar. The revival of cryptocurrencies may also have played a role in the weaker gold price.
Subscribe to our blog
Are you interested in financial news? Subscribe to our blog and receive new articles directly in your mailbox.