Market Overview – August 2021

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Market Performance 1st – 31st August 2021 (in GBP Total Return)

  • FTSE 100 +1.34%
  • S&P 500 (USA) +4.20%
  • FTSE Europe Ex UK +1.99%
  • Topix (Japan) +1.53%
  • MSCI Emerging Markets +2.39%

China and the wider emerging market region continued to experience heightened volatility as concerns over state-imposed regulation of various sectors rumbled on. During the summer months, trading activity and volumes decrease, and August was no exception. While the lull in activity can result in subdued market movements, shocks are often exacerbated by the lower volumes. Despite this, most major equity markets posted positive gains over the period.

The Fall of Afghanistan

  • Afghanistan fell into the hands of the Taliban following the withdrawal of US troops and subsequent collapse of the Afghan government. However, the resulting impact on global stock markets was muted as investors focused on how global leaders responded to the deepening humanitarian crisis.

Signs from China - Should the World be Worried?

  • To stem outflows and calm investor jitters over the regulatory crackdown in China, its central bank provided a cash injection and regulators held a virtual meeting with executives of major investment banks. Some banks were adamant that the policies were targeted, and not intended to hurt firms in other industries. This provided a welcome boost to equity markets in the region, which saw positive knock-on effects in other regions also.
  • China’s economy showed increasing signs of slowing as it struggled to deal with rising COVID-19 cases, flooding, supply chain issues and a stuttering global recovery. Data releases showed growth in China's retail sales and industrial production slowed sharply in July. The return of strict lockdowns in some cities and domestic travel curbs at the height of the summer holiday season also restrained consumer demand.

…The US Doesn’t Appear to be

  • In the US, generally favourable corporate earnings saw the S&P 500 and NASDAQ indices recording new record highs, despite economic data highlighting that US economic growth decelerated in the second quarter of 2021. According to the Department of Labor, gross domestic product reclaimed its pre-pandemic level, expanding at a quarterly annualised pace of 6.5%, but coming in below the expected 8.5%.
  • A particularly positive US jobs report drove the S&P 500 to another record high after non-farm payrolls increased by 943,000, well ahead of the 870,000 expected and marking the largest gain in the figures since August 2020.
  • More market highs were broken in the US following supportive language from US Federal Reserve, which indicated that an end to its supportive policies may be further away than markets think. Concerns around the Delta variant, and the fact many key data points were still some way off their pre-pandemic levels, were key reasons for delaying the end to supportive measures. 

Inflation Figures Remain in the Crosshairs

  • The topic of inflation has continued to rumble on, but has done little to worry markets yet. While most major economies have experienced a rise in inflation, predominantly caused by energy, food and used car prices, official data has been in line with market expectations.
  • The Bank of England said it saw higher inflation as "largely transitory", but suggested there was a strong possibility that some withdrawal of supportive measures would be required to bring inflation back towards 2%.
  • Annual inflation for the Eurozone increased to 2.2% in July, up from 1.9% in June and slightly higher than the European Central Bank’s 2% target. Rising energy prices were again the main culprit.

Summary:

Chinese and other Asian markets are likely to see volatility continue as the finer details surrounding regulatory restrictions become clearer. This has the potential to spill over into other regions, given the global reach of many companies which may be affected by the clampdown. The spread of the COVID-19 Delta variant remains a cause for concern, but continues to be counteracted by successful vaccination rollouts across various regions. The key question for markets remains how and when central banks will look to reduce economic support.