Last week’s market activity
The market’s focus this week has changed to concerns about the prospects of growth in the US and other global economies, particularly China, after last week’s turmoil.
The geopolitical concerns arising from developments in Afghanistan, China’s regulatory crackdown against technology names, and Toyota’s slump after news about a worsening shortage of chips all set the mood for a very gloomy few hours, even though markets did stabilize on Friday. The possibility that the Fed might slow down the pace of bond buying at some point in the year, as well as the publication of the minutes from last month’s meeting, has impacted sentiment greatly.
Chinese stocks that are listed in the US continue to decline in the face the Communist Party’s regulatory assault. The Nasdaq Golden Dragon Index for such names fell sharply again, now at 52%.
Equities saw sharp drops in commodity prices and a general ‘risk-off” sentiment, which led to declines all across the board. With a 0.6% drop, the US held up the best. The UK was 1.9% down and Europe 1.9%. However, it was the Far East, emerging markets and Japan that suffered the most. Japan dropped 3.9%, Shanghai fell 2.5%, Hong Kong fell 5.8%, and the global emerging markets were more broadly affected by 4.7%.
Energy and materials suffered the most severe losses, with a drop of 6.5% and 5.3%, respectively. The sector-specific consumer discretionary and financial sectors were next, with a drop of 4% and 3%, respectively. The best performers were classic defensive areas such as utilities (up 1.6%) and healthcare (up 1.5%).
Fixed interest markets were subject to a double-edged pull from geopolitical worries and weakening data on the one hand and Fed’s explicit comments that tapering might occur earlier than expected. The growth fears and COVID-19 concerns have grown over the past two weeks. However, US yields managed not to fall below the 1.17% levels from earlier in the month. They fell marginally to 1.26% over the week. Similar trends were seen in other major bond markets, with yields falling slightly for both the UK Gilts and German Bunds.
Commodities suffered sharp drops in economically sensitive areas like copper and iron. Copper dropped 5.6%, and Brent crude oil fell nearly 8% due to fears about Chinese growth. There were also restrictions placed on large Chinese ports in order to combat COVID-19. Slower than expected growth also contributed to the drop. Iron ore, which fell 13% in the past week, was the worst performer.
Gold performed well in a risk-off environment and rose 0.1% during a volatile week for other riskier assets.
Sterling fell by 1.1% against major currency pairs during the week, according to a trade-weighted basis. It dropped to $1.36 against $1.39 and EUR1.16 against the euro, slightly easing the fall in overseas markets for UK-based investors.
The week ahead
Monday/Wednesday: Markit and IFO survey purchasing managers
Our thoughts: With resurgent cases of delta-variant, evidence that economic growth is slowing after the sharp recoveries of the second quarter, and further news about supply bottlenecks in semiconductors, it should not surprise to see confirmation of this trend in the purchasing managers surveys due this week in most major markets. The consensus expectations are for a slight drop in economic growth, regardless of whether it is in the US, Europe or the UK. Markets may be concerned by any evidence of a greater deceleration, as future earnings growth is crucial to maintain valuations.
Friday: US Private Consumption Expenditures Index (PCE).
Our thoughts: This is the main measure that the US Federal Reserve uses to assess America’s inflation. Recent data for US CPI show some evidence of a slower pace of price rises. Even though the recent sharp rise in inflation is unlikely not to stop soon, any slowdown could help ease some of the concerns about inflation becoming more entrenched in expectation. According to consensus forecasts, the year-on–year increase in inflation is expected to be around 4.1%. Core (excluding energy costs) will rise to 3.6%.
Thursday through Saturday: Jackson Hole Symposium
Our thoughts: The annual Jackson Hole jamboree of central bankers will be a major focus for the week ahead. Inflation was a topic that Fed chair Jerome Powell calmed last year. He suggested that a balanced approach be taken (where increases above the target would not be tolerated given the persistent undershoot from previous years). This is now being challenged by sharp price rises as economies recover after last year’s lockdowns. We will likely hear more from Powell this time around about his view of the tapering process, after more hawkish comments in the Fed minutes last week. Any indications that this hawkishness may be lessened will likely be taken positive, as it would prolong the extraordinary period in excess liquidity that helped to support asset prices during the pandemic.
The symposium will likely also focus on the challenges to the global central banks policy architecture due to the rise in cryptocurrencies. Any major policy guidance could cause volatility in the prices bitcoin, ethereum, and other popular tokens.
