Markets last week
After last week’s torpor, the market’s main narrative this week has shifted to concerns over the prospects for growth within the US and global economies, especially China.
Geopolitical fears given developments in Afghanistan, the spread of the delta COVID-19 variant, China’s regulatory crackdown on technology names and Toyota’s slump following news over a worsening chip shortage all set the tone for a relatively gloomy few days, even if markets somewhat stabilised on Friday. Following publication of the minutes of last month’s meeting, the possibility that the Fed may slow the pace of bond purchases at some point this year also served to undermine sentiment significantly.
Chinese stocks listed in the US continued to retreat in the face of the Communist Party’s regulatory onslaught, with the Nasdaq Golden Dragon Index of such names falling sharply again; it is now down over 52% from its February peak.
In equities, sharp falls in commodity prices and a generally ‘risk-off’ sentiment saw declines across the board. The US managed to hold up best, with a fall of only 0.6%. However, Europe was down 1.9% and the UK fell around 1.5%. But it was the Far East and emerging markets in particular that bore the brunt of selling; Japan fell 3.9%, Shanghai by 2.5%, Hong Kong by 5.8% and global emerging markets more widely by 4.7%.
In sector terms, energy and materials were the hardest hit, down 6.5% and 5.3% respectively, followed by the economically sensitive consumer discretionary sector, down 4% and financials, down just less than 3%. Classic defensive areas like utilities, up 1.6% and healthcare, up 1.5%, were the best performers.
Fixed interest markets faced a two-way pull between geopolitical concerns and weakening economic data on one hand, and the Fed’s more explicit comments about the prospect of tapering taking place perhaps a little earlier than had previously been expected. As the growth scare and COVID-19 fears have continued to grow over the last two weeks, US yields managed to keep their head above the 1.17% lows from earlier this month, declining marginally over the week to 1.26%. Other major government bond markets behaved similarly, with both German bunds and UK Gilts seeing small declines in yields.
Commodities saw sharp falls in more economically sensitive areas, such as copper and iron ore. Crude oil was also weak. Copper fell 5.6% and Brent crude oil by nearly 8% as fears over Chinese growth, restrictions on some of the largest Chinese ports to fight COVID-19 and slower than expected growth hit sentiment. Iron ore fell the furthest, down 13% over the week.
In the risk-off environment, gold performed its defensive function well, rising 0.1% in an occasionally savage week for riskier asset classes.
Sterling weakened against major currency pairs over the week, falling by 1.1% on a trade-weighted basis. It fell to $1.36 from $1.39 against the US dollar and to €1.16 from €1.18 against the euro, somewhat alleviating the falls in overseas markets to UK-based investors.
The week ahead
Monday/Wednesday: purchasing manager surveys from Markit and the IFO
Our thoughts: with resurgent delta-variant cases, widespread evidence that the pace of economic growth is moderating from the sharp recoveries seen in the second quarter and further news on supply bottlenecks, particularly in semiconductors, it would be no surprise to see some confirmation of this in the purchasing manager surveys due this week in most markets. Consensus expectations are universally set to see a slight decline, whether in Europe, the UK or the US. Any evidence of a sharper deceleration may worry markets, given the importance of future earnings growth to sustain valuations.
Thursday through Saturday: Jackson Hole Symposium
Our thoughts: the annual central bankers’ jamboree at Jackson Hole in Wyoming is likely to be a key focus in the coming week. Last year, Fed chair Jerome Powell soothed markets by setting out a balanced approach to inflation (where rises above the target would be tolerated in light of the persistent undershoot of previous years), a process now being tested by the sharp rise in prices seen as economies recover from last year’s lockdowns. This time round we are likely to hear much more about how he sees the tapering process unfolding, following more hawkish comments made in the Fed minutes released last week. Any signs that this hawkishness is being diluted will likely be taken positively as it would extend the extraordinary period of excess liquidity that has done so much to underpin asset prices through the pandemic.
It is also likely the symposium will focus on the challenge to the global central bank policy architecture posed by the rise of cryptocurrencies, with any major policy guidance potentially causing volatility in the prices of bitcoin, ethereum and other popular tokens.
Friday: US Private Consumption Expenditures Index (PCE)
Our thoughts: this is the key measure used by the US Federal Reserve to assess the state of inflation in America. The most recent data points for US CPI showed some evidence of a slightly slower pace of increase in prices, and even if the recent sharp increase in inflation is unlikely to abate quickly, any slowdown would help calm some of the worries about the possibility for inflation becoming more entrenched in expectations. Consensus forecasts have the year-on-year number rising slightly to around 4.1%, with the core measure (excluding food and energy costs) climbing to 3.6%.
Markets for the week
|In local currency
|Hong Kong equities
|Emerging market equities
|Government bond yields (yield change in basis points)
|10-year US Treasury
|10-year German Bund
|Commodities (in USD)
|Brent oil (bbl)
|WTI oil (bbl)
|Copper (metric tonne)
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
Suddenly a more explicit conversation about tapering at the Fed
The release of the Fed minutes from the July meeting wrong-footed markets and heralded a more aggressive stance from the FOMC with regards to reducing the pace of asset purchases earlier than previously expected. A combination of a strong economic recovery and a sharp rise in inflation appears to have been enough to forge greater unanimity in the rate-setting committee around the need to begin the process of withdrawing liquidity support in 2022; previously the timeline had been less clear, with some expecting tapering to begin six or even twelve months later. Markets took some fright from this, with bond yields falling on the news and equity markets selling off.
Late in the week Toyota announced it is to slash worldwide vehicle production by 40% in September because of the global microchip shortage. The company had planned to make almost 900,000 cars next month but has now reduced that to 540,000 vehicles. Volkswagen has warned it may also be forced to cut output further. General Motors, Ford, Nissan, Daimler, BMW and Renault, have already scaled back production in the face of the global chip shortage. Until now, Toyota had managed in the main to avoid doing the same due to running higher inventories than its competitors.
A mixed week, with some notable downside economic surprises colouring a more risk-off environment driven by the Fed’s talk of tapering
Surveys: the New York Empire State manufacturing survey which came out at the start of the week set the tone, with a precipitous fall from the previous reading of 43 to 18.3; although a decline had been expected, with supply bottlenecks and rising delta variant cases (consensus was looking for 28.5). This drop set the tone for a number of other weaker surveys during the week, with the much-watched Philly Fed Business Outlook Indicator falling to 19.4 from the previous month’s 21.9 and expectations of a rise to 23.1.
Retail sales and other data: month-on-month retail sales showed a decline of 0.7% compared with expectations closer to flat, and the National Association of Home Builders’ (NAHB) Housing Market Index fell to 75 from the previous level of 80. In addition, the Citigroup US Economic Surprise Index hit its lowest level in roughly 15 months on Thursday, although bond yields rates have (so far) not followed the move to fresh lows over the past couple of weeks.
Unemployment: this somewhat gloomy narrative can be set against other US economic data which was quite encouraging. US initial jobless claims dropped for a fourth consecutive week, falling by 29,000 to a pandemic low of 348,000. Continuing claims also fell to 2.8 million, which is also the lowest figure since the pandemic began. Some states and cities have reintroduced mask mandates and some businesses have pushed back their return to office plans, but, even if sentiment is being impacted, there isn’t yet any evidence that the surging delta variant has resulted in actual layoffs, particularly as so far there haven’t been any further restrictions applied to restaurants, bars and hospitality venues.
A mixed picture from the data, with weak numbers interspersed with some robust ones
Inflation: Consumer Price Index (CPI) surprised on the downside, with a print of 2.1% year-on-year much lower than the expected 2.3%. The core measure came in still lower at 1.8%, below the BoE’s 2% target. Nonetheless, it is unlikely that numbers for the rest of the year will show a continuation of this decline, given pipeline price pressures. The Retail Price Index (RPI) data didn’t show this decline, remaining at the same level as the previous month at 3.9%.
Retail sales: UK retail sales data showed the sharpest drop since the economy was in lockdown in January. Sales fell 2.5% in July and by 2.4% excluding fuel, against expectations of a small increase, while June’s numbers were also revised lower. Year-on-year there was still a rise of 1.8%, although this compares with consensus forecasts of a 5.8% increase. The softness probably reflects some temporary distortions around spending surrounding the European football championship, although the outcome mirrors what happened in the US.
Unemployment and earnings: unemployment came in at 4.7%, which was marginally better than expectations. It seems the gradual unwinding of furlough schemes is being absorbed comfortably into the workforce for the time being. Average hourly earnings showed a sharp increase to an 8.8% annualised rate, causing some headaches for the government in terms of its commitment to a triple lock on state pensions.
Other data: elsewhere there was better news, with the public sector net borrowing requirement coming in much lower than expected in July, at only £2.3bn. Consensus estimates had been for an increase in the national debt of £11.3bn.
A quiet week for data, before the pick-up in the coming few days
GDP: eurozone GDP came in at 2.0% for the second quarter and 13.6% year-on-year, as the data lapped the low point from the pandemic last year. The year-on-year rise, whilst impressive, lags behind the larger increases in the UK and the US, although European GDP did fall less steeply this time last year.
German Producer Prices (PPI): PPI numbers across the world have been eye-popping recently, and the German numbers conformed to this trend, with a rise of 1.9% in the month and of 10.4% over the year. As yet these price rises have tended to be absorbed by companies, meaning there is little evidence in general of output prices rising at anything like the same rate.
Weaker growth and still more regulatory pressure in China
China: Chinese retail sales were much weaker than expected in the face of aggressive lockdowns to stem the spread of the delta variant; the 8.5% year-on-year rate was well below the 10.9% consensus forecast. Industrial production was also lower than predicted, coming in at 6.4% annualised against 7.9% expected. Other weak numbers were seen in fixed asset formation and property investment.
There were also further developments on China’s regulatory clampdown where new data privacy laws were approved; details are still scant, but the law is going to clarify how personal data can be used, ensure compliance systems are in place and put limits on what data can reasonably be collated. In that respect, it doesn’t sound dissimilar to General Data Protection Regulation (GDPR). There have also been reports in the state media calling for tougher oversight to protect consumers with spirits producers, cosmetics firms and online pharmacies also in the cross hairs.
The combined effect was to sharply reduce risk appetite amongst investors, with the local equity market sharply lower, led by the big technology names.
Japan: in Japan, Q2 GDP came in at 0.3% for the second quarter, which was better than expected. The year-on-year rate similarly outperformed predictions, at 1.3%.
After the quiet previous week, the major industrial complex commodities were hit hard as investors fled economically sensitive plays. Policy action in China, the partial closure of one of the largest Chinese ports to combat COVID-19 and wider fears to economic growth all hurt sentiment. Crude oil was down 7.7% for Brent and by nearly 9% for WTI, to $65.2 and $62.3/barrel respectively. Copper fell 5.6% to $9037/tonne. Gold held up well, rising slightly in value over the week and closing at $1781.11/oz.