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July Asset Market review

Aug 5, 2021

• The global growth story is intact, with the Delta variant, the caveat
• US growth is now at the same level as pre-COVID, Europe should catchup by Christmas
• US equities still lead the way
• Asia is under pressure as China clamps down and vaccine rollout still relatively slow
• Commodity price uptrend continues

Equity Markets Month YTD   Bond Markets Month YTD
S&P 500 INDEX 1.0 17.0   Global Aggregate 1.31 -1.92
DOW JONES IND 0.4 14.1   Global High Yield 0.04 2.19
NASDAQ COMPOSITE 0.2 13.8   Treasuries 1.59 -3.08
NIKKEI 225 -5.2 1.1        
Euro Stoxx 50 Pr 0.1 15.1   Precious Metals Month YTD
FTSE 100 INDEX -1.3 8.9   Gold 2.49 -4.6
SWISS MARKET INDEX 1.3 13.2   Silver -2.43 -3.4
MSCI AC ASIA x JAPAN -6.2 -2.7   Platinum -2.22 -1.1
MSCI Daily TR Net World 0.8 15.1        
MSCI EM -5.7 -1.0        
Straits Times Index STI 1.2 11.0        
CSI 300 INDEX -5.3 -6.5        

Source: Bloomberg

July was a perplexing month in many ways for markets and economies. More than one instance of growth scares, or weak numbers, caused sharp market reactions, only to be reversed quickly. Overall performance was quite solid, on the whole. The MSCI World Index rose 0.82% in total return terms for the month. Among the major markets, the leader was once again the US, where the S&P 500 returned 1% in July.

For the remainder of the year, the main risk to markets could be the Delta variant. As we write, there are confusing numbers from various countries about the spread and seriousness of the Delta wave. In both India and the UK, infection numbers have dropped very quickly from the peak. In the UK, the rate of hospitalisation appears to be well below projections based on previous experience. The UK is approaching a rate of 60% of its population being fully vaccinated. Europe and the US are still lagging but aren’t far behind. However, in the US, certain areas are still struggling to get the rate as high as the national average, which is about 50%, and infection levels are causing renewed concern.

Economic data released in July underscored a predominantly constructive outlook for the rest of the year, with the noted caveat of the further spread of Delta. The second-quarter US GDP numbers came in at 6.5%, annualised for the quarter. This was a little lower than some in the market had been forecasting, but the underlying composition of the number had some features that suggest further upside in the quarters ahead.

The undershoot compared to expectations was mainly due to lower government spending and the rundown of inventories. The latter could very well be down to the continued bottleneck issues in the supply chain and should reverse in the second half of the year as businesses respond to strong consumer demand. On this front, the numbers were strong: real consumer spending was higher by 11.8%.

With the economic recovery on track, the rotation theme could still have legs. In July, the strongest sectors were utilities and real estate, which rose 3.0% and 3.7%, respectively, in a rare win for the old school sectors. Utilities are still down 0.4% YTD. Other strong sectors in July were healthcare (2.9%) and information technology (2.3%).

A notable laggard was the energy sector, which dropped 9.8% in July, despite the underlying commodity ending the month essentially flat: WTI crude oil was up 0.65% on the month to end at $73.95 per barrel. It did have a brief dip down to $66 per barrel, which spooked the equity markets, where the view may still be that OPEC+ will sooner or later figure out a way to increase production.

By market, Asia was the standout underperformer in equities. The Nikkei was down 5.2%, the Hang Seng dropped 8.3%, and the CSI 300 fell 5.3%. The broader Asia ex-Japan MSCI Index was down 6.2%. Two main factors appear to be behind the underperformance: First, the rate of spread of the Delta variant across some Asian countries is proving to be a clear dividing factor in driving economic performance relative to other markets. Second, the surprising clampdown by China on the education sector, coming hard on the heels of regulatory action taken against several of the tech giants, and cooled investor enthusiasm for the region until greater clarity emerges. The difficulties in containing COVID reflected in Emerging Market equity returns as well, with the overall MSCI EM Index down 5.7% for the month.

The European equity market recovery is intact, rising a modest 0.1% on the month and 2.9% over the past three months. The UK’s FTSE index fell 1.3%, not helped by its somewhat more heavy concentration of energy names. The overall level of GDP in Europe is now recovering at a strong clip, rising 8.3% annualised in Q2. At this rate, it is on track to reach its pre-COVID level by the end of the year.

The strong performance of US Treasuries dominated fixed income returns for the month. The yield on the 10-year bond dropped to 1.22% from 1.47%. This returns it to the rate that prevailed in mid-February this year. US Treasuries gained 1.59% for July on the back of this yield decline, with the broader Global Aggregate Index rising 1.31%. For the rolling one-year period, the Global Aggregate is now in the positive territory (0.78%), but Treasuries are still down 0.52%.

Credit markets did not do quite as well but eked out some gains nonetheless. Global high yield rose 4 basis points, and hard currency EM debt gained 14 basis points, as credit failed to keep up with the pace being set in government bond markets. However, the rally in spreads over the past 12 months shows in the one-year numbers, where the US and Global High Yield are running around 10% in total returns, much firmer than government bonds.

There were small losses for silver and platinum (2.4% and 2.2%, respectively), offset by a similar gain in bullion. Across the rest of the complex, however, the recent uptrend remains intact. Copper, aluminium, and jet fuel posted gains between 3% and 4%, and soft commodities from cotton (5.3%) to maize, pork bellies, and coffee all rose by more than 15% on the month.

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