Monthly Market Review
Review of markets over August 2021
The global reopening continued in August, with a number of developed markets further lifting restrictions. Economic data was strong, though much of the developed world appears to be at or just past the peak rate of growth, with August’s flash purchasing managers’ indices (PMIs) moderating, yet still at high levels.
On the virus front, the Delta variant continued to spread and daily cases have picked up across the globe. In Europe and the UK, the vaccination programmes have meant that hospitalisations have not risen anywhere near as fast as during the last wave. In the US, hospitalisations have increased more sharply, raising some concerns that the link between infections and hospitalisations has not been as effectively broken there due to lower vaccination take-up. Data out of the UK and Israel also suggests that antibody protection from the vaccines wains after six months, although protection against severe disease, and crucially hospitalisation, still remains high. In response, a number of countries have announced booster programmes to deliver third doses to their populations. For the moment, our base case remains that the global reopening will continue, with the impact of the Delta variant likely to be more evident in ongoing supply chain disruptions rather than a return to economic shutdowns in the developed world.
Global equities delivered total returns of 2.5% in August. Growth stocks benefitted from continued low US yields to post total returns of 3.3%, helping the S&P 500 to deliver returns of 3.0% over August. Emerging market (EM) equities initially stalled under the combination of a tougher stance from Chinese regulators and increased virus concerns, but later rebounded to deliver 2.6% over the month. Global bonds fell by 0.4% with investment grade credit spreads widening and sovereign yields rising moderately. Meanwhile EM debt and high yield credit both delivered positive returns.
Exhibit 1: Asset class and style returns
August economic data pointed to an economy that, while past the peak rate of growth, is still running hot, and concerns around inflationary pressures continued to build. August’s flash PMIs printed at 61.2 and 55.4 for manufacturing and services, respectively, and the US headline consumer price index (CPI) delivered another bumper print of 5.4% year over year, to stay at decade highs. Under the surface, however, core CPI fell marginally and pressure from a number of areas, such as used cars, which have driven inflation in recent months, appears to be softening. On the other hand, the labour market went from strength to strength. The July jobs report added 943,000 jobs and saw wages rise by 0.4% month over month. This suggests that while headline inflation may begin to ease as transitory factors start to fade, underlying longer-term wage pressures are continuing to build.
Federal Reserve (Fed) Chairman Jerome Powell’s Jackson Hole speech was well received by the markets. The Fed is content with the progress made on inflation, which it still believes will be transitory, and expects the labour market to reach the bar for tapering shortly. We continue to expect an autumn announcement and no change to the timeline for tapering to start around the end of this year. Powell also emphasised that the timeline for tapering is separate to that for rate increases. All eyes will now turn to the September meeting of the Federal Open Market Committee for more news on tapering and the release of the committee’s latest rate forecasts.
In the political arena the Senate passed a bipartisan infrastructure bill that contains USD 550 billion of new spending. The bill has now moved to the House of Representatives where it faces a much tougher battle. Progressive House Democrats are reluctant to support the deal unless it is tied to a much larger USD 3.5 trillion spending bill that the Democrats hope to pass via the budget reconciliation process (relying only on Democrat votes). It is likely that the final package will be agreed in the autumn and end up somewhere between the two figures.
Exhibit 2: World stock market returns
The UK finally lifted the last domestic Covid-19 restrictions in August. Those who are fully vaccinated no longer have to isolate if they come into contact with someone who tests positive for Covid-19, and the remaining restrictions on activity have been lifted. Daily coronavirus cases, which fell at the beginning of the month, have risen steadily through the latter half of August, but for the moment hospitalisations have remained stable as the vaccines reduce the numbers requiring treatment.
The August flash PMIs suggested that the UK may also be past the peak rate of growth with manufacturing remaining steady at 60.1 while services softened slightly to print 55.5, with supply chain and labour constraints continuing to limit activity. That said, the strength of the domestic reopening, helped propel the FTSE All Share to deliver total returns of 2.7% over August with the more domestically focused FTSE 250 returning a particularly robust 5.3% over the month.
UK employment data was also strong: the economy added 95,000 jobs in June and the employment component of August’s flash PMIs was the highest in history. The proportion of the workforce on the furlough scheme, which is due to end in September, remained steady at around 7% but with job vacancies at record highs, it seems likely that the scheme should be able to wind down successfully, which may help alleviate some of the labour constraints the economy is currently facing.
UK CPI also softened slightly in August to 2.0% year on year, however it is likely only a temporary pause. With inflation concerns rising, the Bank of England outlined the sequence by which it will withdraw its policy support. The plan will see the Bank cease to reinvest proceeds from bonds that mature once interest rates reach 0.5%. They will then consider actively selling bonds once interest rates reach 1.0%.
August was a quiet month for continental Europe with the European Parliament in recess and no announcements from the European Central Bank. Having started its reopening later, Europe is slightly behind the US and the UK on the road to normalisation. Economic data was strong with August’s flash PMIs printing 61.5 and 59.5 for manufacturing and services, respectively, and year on year CPI estimated at 2.7%. However, momentum has softened slightly and Europe is now probably at its peak rate of growth, a few months behind the US and UK.
The spread of the Delta variant has caused cases in Europe to rise rapidly, denting consumer confidence, which fell in August. That said, Europe has now vaccinated over 70% of the population and hospitalisation rates have remained much lower than in previous waves.
Exhibit 3: Fixed income government bond returns
Emerging market equities were largely driven by events in China. The Chinese regulatory changes continued through August with a widening number of industries and sectors impacted. EM equities initially declined 4.5% before rebounding towards the month end. While we may see some continued volatility as a result of further Chinese regulatory efforts, our recent On the Minds of Investors piece “Investment implications of recent Chinese policy interventions” sets out why we believe this should not deter long-term investors. China has also had to grapple with the arrival of the Delta variant. It has responded with its proven strategy of mass testing and mobility controls, which thus far appear to have contained the outbreak at the cost of mobility and some economic activity.
Cases in India remain low despite a rebound in mobility, but outside of China and India, the slow pace of emerging market vaccinations has left many countries vulnerable to the Delta variant.
Exhibit 4: Fixed income sector returns
August’s data was confirmatory rather than revolutionary. The global reopening has continued, but as expected, a number of the countries first out of the blocks are now seeing the rates of their recoveries start to slow. The Delta variant continues to pose a risk to the global outlook, but for developed economies, this is more likely to be in the form of supply constraints than further lockdowns. While uncertainty has increased, it is unlikely to derail the recovery. For the markets, August’s economic data seemed to confirm that the easiest part of the reopening is now behind us, so while we still see room for further upside in risk assets, greater selectivity is likely to be required moving forward.
Exhibit 5: Index returns for August 2021