Sep 9, 2021
Company earnings, expanding vaccinations and continued support from fiscal and monetary policy kept risk sentiment steady despite climbing Delta-variant cases across regions. Financial markets appear to have learned to live with COVID.
Growth stocks continued to benefit from the trend lower in US Treasury yields. Developed market (DM) stocks (MSCI World Index) closed 2.5% higher, slightly trailing their emerging market (EM) peers (MSCI Emerging Markets Index), which delivered a +2.6% return. Across regions, tech and ‘growth’ stocks lifted the US benchmark S&P 500 Index (+3.0%) to a seventh straight month of positive gains; the index has nearly doubled since its nadir in March 2020. Across the Atlantic, the rebound in company earnings and a deluge of stimulus saw European stocks record their best streak of monthly gains in nearly eight years, with the Euro Stoxx 600 Index ending August 2.2% higher. Despite initial weakness in EM equities (driven by China’s regulatory crackdown), major Asian bourses closed higher on global growth optimism, with Japan’s Topix up 3.1%; while in China, bargain hunters seized on battered tech shares in the final week of August – overall, mainland China’s CSI 300 Index eked out a flat 0.1%.
In bond markets, there was very little movement either way amid the August lull. The Bloomberg Barclays Global Aggregate Bond Index saw a modest decline of 0.4%. US Treasury yields barely moved, declining 0.2%, while European bonds retreated on hawkish comments from the European Central Bank (ECB). EM sovereign bonds outperformed their DM peers, with notably strong performance out of South Africa, Turkey, India and Indonesia as investors continued to search for yield in riskier markets.
All returns are quoted in US dollars.
US economic data in the past month largely underwhelmed, suggesting an economy past peak-growth as the rapid spread of the Delta variant slowed consumer spending and economic expansion, while inflationary pressures remained at decade highs. The manufacturing purchasing managers’ index (PMI) came in at a downwardly revised 61.1, a decline from the record high 63.4 in July, marking the slowest pace in factory activity in four months. The services PMI fell for a third consecutive month in August, to 55.2 from an all-time high of 70.4 in May (readings above 50 indicate an expansion in output) and well below consensus expectation of 59.5, on the back of Delta, disrupted supply chains and labour-market shortages. Non-farm payroll data for July showed that the US created a million new jobs, more than the market expected. Minutes from the US Federal Reserve’s (Fed’s) mid-August meeting suggested the Fed was split on when it should start tapering asset purchases. However, the message was more dovish at the closely watched Jackson Hole Symposium at month end; Chair Jerome Powell signalled clearly that tapering could start towards the end of this year, but said that acting too quickly would be harmful to the economy. Powell also clearly distinguished between the decision to start withdrawing support and the decision to start hiking rates, leading to market participants reducing their expectations regarding the latter.
The economic rebound in Europe powered on, partly as the region surpassed US vaccination rates during the month. The rapidly spreading Delta variant appeared to have little effect on the consumer-led recovery, with travel and leisure indicators climbing to their highest levels during the summer holidays. The manufacturing PMI came in at 61.4 in August, lower than the 62.8 reading in July, highlighting the severe capacity constraints in the sector. High-frequency indicators continue to suggest activity remains strong in the region, while an OECD tracker which uses machine-learning and Google Trends data as a proxy for the jobs market, consumption and sentiment remained at its highest levels. The upcoming Governing Council (GC) meeting on 9 September is likely to be a challenging one for ECB President Christine Lagarde, with the bloc’s growth rebound and the surge in inflation having reawakened the hawks on the GC, who for the better part of the past year have been in hibernation. The region’s inflation print spiked to a decade-high 3% in August, but the consensus view on the council remains sanguine, with the rising infections and slower pace of vaccinations in recent weeks presenting a cloudy outlook for the road ahead. Growth and inflation forecasts will likely see upward revisions at the upcoming quarterly review, which will make communication a tricky balancing act for Lagarde.
The UK economy is likely past the point of peak growth, with the last of the COVID-19 restrictions lifted during August and signs of slowing growth momentum in Q3. Indeed, the PMIs remained broadly stable in August, with the manufacturing sector gauge coming in at 60.3, marginally lower than July’s 60.4 reading. This marked the slowest pace of factory floor activity since March this year, though this is still a robust reading overall. The services PMI slowed to 55.5 in August from 59.6 the previous month (the slowest pace in expansion since February this year) owing to reports of labour shortages and supply-chain disruptions hampering activity. The labour market continued to improve, with 95,000 jobs added in June. Inflation cooled somewhat in August, with a 2.0% year-on-year (y/y) print, but inflation jitters are still present, with the Bank of England communicating plans to pull back its pandemic stimulus measures to counter price pressures. The central bank projects 3% inflation in August and in excess of 4% for the remaining two months of this year.
The virulent Delta variant slammed the brakes on China’s economic recovery in August, which already looked to be cooling. Authorities have responded swiftly to the spreading virus, reverting to tried-and-tested methods of mass testing and tracking to contain the spread, forgoing short-term economic activity. Official PMIs showed weaker-than-expected readings, with services contracting for the first time since February 2020 as consumers halted spending and travel plans following the lockdown restrictions. On the factory floor, the Caixin China General Manufacturing PMI retreated into contractionary territory (for the first time since April 2020) as Delta-induced restrictions and supply-chain bottlenecks weighed on activity. Consumption, industrial and investment activity indicators have all come in weaker than expected, adding to a weaker outlook for growth in the second half of the year. The People’s Bank of China (PBoC) has since pledged to offer financial assistance to small businesses (SMEs) and better use of local-government bonds. The central bank has committed to US$46.4 billion in cheap funding to banks to help SMEs, and economists expect more targeted measures in the coming months, given Beijing’s concerns over China’s growth outlook.
The mood on SA factory floors improved in August, with the manufacturing PMI soaring to a record high 57.9 in August (the quickest pace of expansion since record-keeping began just over two decades ago) as the economic climate improved following the civil unrest which disrupted supply chains and industrial activity. The hospitality and alcohol industries saw domestic demand return following the easing of lockdown restrictions, while respondents to the survey also noted a promising increase in exports. In the labour market, the official unemployment rate in SA rose from 32.6% in Q1 2021 to 34.4% in Q2 2021, the highest jobless rate ever recorded since the introduction of the Quarterly Labour Force Survey (QLFS) in 2008. Inflation eased in line with market expectations. Headline inflation increased by 4.6% y/y in July from 4.9% y/y in June, driven by core inflation, which decelerated from 3.2% y/y in June to 3.0% y/y in July. The South African Reserve Bank Monetary Policy Committee is scheduled to meet on 23 September 2021, when it is expected to keep policy accommodative for longer.
In politics, the South African government announced a cabinet reshuffle, which saw Tito Mboweni depart as Finance Minister earlier than some expected and the appointment of a new Minister in the Presidency, who is tasked with speeding up the implementation of much-needed reforms. It is hoped this marks a turning point for the country.
The Bloomberg Commodities Index ended the month slightly weaker (-0.3%). The price of Brent Crude fell to US$65 a barrel in mid-August, on expectations of weaker global demand due to the Delta variant. But the oil price recovered, ending the month with little change; it remains the top performer year-to-date, up 41.9%. Silver also struggled during August and is now the worst performer among the sample of commodities shown below year to date. Gold ended marginally softer; the precious metal is down 5% this year.
Figure 1: August 2021 % change (US$)
Source: Bloomberg as at 31.08.21.
South African equities ended the month in negative territory, with the bumper earnings prints in the mining sector not enough to offset the regulatory headwinds weighing on the FTSE/JSE All Share Index’s (ALSI) heavyweights (the Naspers-Prosus stable). The benchmark declined by 1.74%, while the Capped SWIX ended with a +2% return as capped indices fared much better during the month. At a super-sector level, resources (-4.8%) gave up the previous month’s gains, as did industrials (-4.5%), while financials bounced back strongly (+11.9%). Local bonds (JSE All Bond Index, 0.8%) ended the month up 1.7%, tracking a firmer local currency on the back of a dovish Fed, while debt metrics improved following growth-data revisions. The highly volatile listed property (JSE All Property Index) sector recovered from the prior month’s losses, with a 7.1% return in August. Cash, as measured by the STeFI Composite Index, remained broadly stable at 0.3% for the month. In currencies, the rand strengthened against the greenback, euro and pound sterling.
At the sector level, it was another mixed bag of returns across the bourse. Sector leaders over the month were found in healthcare, consumer services (retailers, travel & leisure) and financials (banks); ‘SA Inc.’ (companies that derive most of their revenue from South Africa) performed strongly over the period as lockdown restrictions were eased. Financials delivered robust returns as the banks tracked in lockstep with a firmer rand. Basic materials gave up some of last month’s gains, with general mining (BHP Group and Pan African Resources) and the precious metals miners (AngloGold Ashanti and Impala Platinum) all pulling back over the period.
Selection of FTSE/JSE All Share Index stock performance
|Name||Index weight||Aug 2021 % return (ZAR)|
|Standard Bank Group||2.3||20.4|
Source: Bloomberg as at 31.08.21.