Market Update from the Global Asset Allocation Team – August 2021
Sentiment wavered somewhat in July as investors contemplated the global spread of the highly-transmissible delta variant and its implications for the reopening and the recovery. Still, there are reasons to be more optimistic than during previous Covid waves, with vaccines weakening the link between infections, hospitalizations, and deaths. Encouragingly, risk appetite remained fairly buoyant as strong economic and corporate earnings results boosted confidence in the outlook and countered virus-related angst, though headlines around China’s sweeping regulatory reforms added a layer of uncertainty and spooked global financial markets towards month-end.
Global equity markets held firm even in the wake of the profound rout in Chinese stocks. However, when looking beneath the surface, underlying sector leadership revealed that investors turned decidedly cautious and assumed a defensive stance in July. The global surge in virus cases sparked some fears about the recovery and curbed demand for economically-sensitive sectors such as resources and financials, while investors sought a refuge in areas seen as more immune to the economic cycle, such as technology. In response, the tech-heavy US stock market outperformed its cheaper peers. Meanwhile, emerging market stocks underperformed by a wide margin as China’s widening regulatory crackdown sent developing stocks spiraling.
Fixed income markets posted positive results in July. Yield curves bull-flattened, with long-term bond yields tumbling lower even despite the relentless rise in US inflation. Somewhat surprising is that inflation fears have subsided and breakeven rates (a gauge for market-based inflation expectations) barely budged even after the hottest inflation print in more than a decade. Instead, traders brushed off pricing pressures as transitory, a point that Federal Reserve Chair Powell has been driving home for months.
The US dollar softened after Federal Reserve Chair Powell said the central bank has not yet met its goal of “substantial further progress” that’s required to taper asset purchases, saying that there is still some ways to go to meet the conditions to scale back support. Meanwhile, the euro fluctuated after the ECB updated its forward guidance to indicate that the 2% inflation target is no longer a ceiling, solidifying its commitment to accommodative policy for an extended time. The Canadian dollar came under pressure given the erratic moves in crude markets, but recouped some of its earlier losses as oil prices recovered late in the month.
Oil prices were whipsawed in July. Crude initially stumbled on concerns that the spread of the delta variant could dampen consumption just as OPEC+ added back to production. However, oil regained some ground amid optimism that renewed global demand will lead to a continued tightening of the market. Copper advanced as Chinese economic data pointed towards a steady recovery, while the prospect for massive US infrastructure spending also boosted the outlook for demand. Finally, gold rose after Chair Powell defended the Federal Reserve’s ultra-accommodative stance and repeated that its still premature to scale back on support, while renewed virus-related growth fears prompted investors to bid-up the safe haven metal.