Market and Economic review for week ending 30 July 2021
Tactical review & outlook
Given the strong rally in equities year to date and the increasingly uncertain outlook for inflation and interest rates, we moved tactical positioning back to neutral in Equities and Fixed Income a couple of weeks ago, while maintaining a diversifying overweight to Alternatives. This also coincides with the summer trading months, which tend to see much lower volumes traded as markets pause for a holiday break. We feel we are therefore well positioned to deploy capital where and when opportunities present themselves. As ever, we continue to monitor the changing outlook and respond accordingly. Next week, the Bank of England’s Monetary Policy Committee meet to discuss interest rates and stimulus, while US Non-Farm Payrolls are released and PMI’s are confirmed.
Market and Economic review
Earnings season moved into full swing this week, with a number of US and European companies reporting their 2nd quarter performance. The rebound from the pandemic and government imposed lockdowns has been especially evident in releases this week. In Europe, Q2 earnings have brought strong growth and elevated Earnings per Share (EPS) beats; with a third of European companies having now reported, 63% of them have now beaten expectations on EPS and 67% on sales. The strongest areas have been basic resources, health care and construction; while laggards have been across telecoms, personal care and energy. These results saw the STOXX 600 index hit fresh highs of 460.57 on Thursday. In the US, there have been similarly impressive beats. Of the 253 S&P500 companies that had reported at the time of writing, total earnings surprise beats was an impressive +18.69%, while sales surprise sat at +5.05% - the only laggard being utilities (-0.73%). The S&P500 continued its ascent off the back of these reports, rising 0.17% on the week.
These earnings releases have coincided with the IMF’s re-evaluation of global growth this week. In their report, they maintained their 6% global growth forecast for 2021; upgrading their outlook for the US to 7% in 2021, from 6.4% previously forecast. The projections assume the U.S. Congress will approve President Joe Biden's roughly $4 trillion in proposed infrastructure, education and family support spending, largely as envisioned by the White House. Positive spill-overs from the U.S. spending plans, along with expected progress in COVID-19 vaccination rates, are boosting the IMF's 2022 global growth forecast to 4.9%, up a 0.5 percentage point from April. However, on a less positive note, the IMF cut its growth forecast for emerging Asia (by 1.1% points, to 7.5%), as a spike in coronavirus cases from new variants and slow vaccination uptake cloud the region's recovery prospects. That was a much bigger downgrade than a 0.4 point mark-down for emerging economies across the globe. The growth forecast for India was cut by 3.0 points to 9.5% and the ASEAN-5 group consisting of Indonesia, Malaysia, the Philippines, Thailand and Vietnam was marked down by 0.6 points to 4.3%.
Attentions turned once again to the Federal Reserve’s Policy meeting this week, as investors try to understand when and how the central bank might begin to pull back on their bond buying programme, from their current purchase schedule of $120bn bonds each month. The view coming from Fed Chair Jerome Powell is that the US economic recovery remains on track, in a policy statement that remained upbeat. The focus centred on the US job market, which “still has some ground to cover” before it would be time to reduce economic support. Powell stressed that he would want to see some sustained, strong job numbers over the coming months before pulling back on stimulus would be considered. Powell played down, at least for now, the risk that the renewed spread of the coronavirus through its more infectious Delta variant would put the recovery at risk or throw the Fed off track as it plans an exit from crisis-era policies. The dollar index fell to 91.86 at the end of this week, down -1.13% on the previous week, as markets focused on those labour market comments, while US 10yr treasury yields also inched lower – down -3.1bps w/w.
Data out of the US this week was mixed, with US new home sales missing expectations (676,000 vs 800,000 expected), as well as Q2 GDP, undershot its forecast of 8.5% - coming in at a still solid 6.5% on an annualised basis and pulling the GDP level back above its pre-pandemic peak. Additionally, US Labour Department said that initial claims for state unemployment benefits fell by 24,000 last week, to a seasonally adjusted level of 400,000.
Despite global COVID-19 cases continuing to rise, the UK is beginning to see case numbers drop; a -37% fall in the last week being the second largest drop in cases this calendar year. The end of the European football championships, a recent heatwave and the break-up of children from schools has been cited as possible explanations and with over 70% of the adult population now having had 2 doses of vaccine, the world continues to pay close attention to the removal of restrictions in a highly vaccinated society. Staying with the UK, Bank of England monetary policy committee member Gertjan Vlieghe said the central bank should not scale back its stimulus possibly until well into 2022 because a recent rise in inflation is likely to be temporary and COVID-19 remains a threat for the economy. Vlieghe also said he would want to see the impact on the economy from the government's withdrawal of its huge pandemic support program over the coming months, including its furlough scheme. Vlieghe added that, “when tightening does become appropriate, I suspect not much of it will be needed, given the low level of the neutral rate."
The Euro zone economy grew faster than expected in Q2, with GDP growth hitting 2% vs expectations of 1.5% in the quarter to June. Among the outperformers were the Eurozone's third and fourth largest economies, Italy and Spain, with quarterly growth rates of 2.7% and 2.8% respectively, while Portugal's tourism-heavy economy expanded by 4.9%. Inflation also accelerated to 2.2% in July, from 1.9% in June – beating 2% expectations, though energy prices were again the driving factor, rising 14.1% y/y. Without the volatile energy and unprocessed food components, or what the European Central Bank calls core inflation, prices rose 0.9% year-on-year, the same as in June. However, German business morale fell unexpectedly in July on continuing supply chain worries amid rising COVID-19 infections, the first decline since January. Almost 64% of industrial firms in Germany complained about bottlenecks in supply chains, while 60% of wholesalers and 42.5% of retailers also reported shortages.
T&IO Weekly Market Update Podcast
Dean Cook CFA, Portfolio Analyst in the Multi Asset Portfolio Management Team at T&IO talks through this week’s latest market developments and T&IO’s current outlook.