1H August Global Market Recap
1st August 2021 – 15th August 2021
The U.S. non-farm payroll has seen the strongest job growth in 11 months, adding 943k new jobs in July. The unemployment rate has also fallen to its lowest level since March 2020, improving faster than anticipated. Labor shortage continues to be a critical factor for the jobs miss as many firms struggle to find employees. The U.S. headline inflation increased 5.4% in July on a year over year basis, registering the biggest increase since August 2008. The CPI index has been rising in 2021, owing to a rebound in consumer spending since Covid restrictions are relaxed.
China’s Caixin Manufacturing PMI dropped to 50.3 in July from the decline of 51.3 in June, the lowest level since last April. The new order sub-index fell into contraction for the first time since May last year, while output index expanded at the slowest pace since last March. China’s PPI rose 9% from a year earlier, mainly driven by coal prices during the peak season. Manufacturers are still struggling with rising raw material prices, surging logistical costs and global supply chain constraints. However, consumer prices have remained relatively stable. Headline CPI rose 1% in July from a year ago, down from the 1.1% growth last month.
The A share market rebounded in the first week of August after July’s painful adjustment but diverged in the second week due to higher-than-expected inflation data and worse-than-expected financial data. Though the sentiment remains weak, the average daily turnover has stayed elevated, remaining above RMB1 trillion for 18 straight trading days. Looking forward, we believe that despite persistence in regulatory uncertainties that will continue to be a major cause of volatility in the near term, the market may have price in the overly gloomy forecast and is becoming more attractive for long term investors. S&P 500 hit fresh record after better-than-expected job report. All three major index registered gains in the first half of August. Both the S&P 500 and the blue-chip Dow gained 1.7% while the Nasdaq increased by 1%.
The 10-year U.S. treasury yield increased by 4.27bps in the first half of the month, after surging by 82.7bps in the first quarter and dropping 27.3bps in the second quarter. In China, fresh virus outbreaks add new risks to a recovery already hit by floods and faltering global demand, with rising expectations for the PBOC to cut interest rates and support growth. The PBOC also emphasized that moderate increases in monetary supply are required to promote high-quality economic development. Major countries’ 10-year government bond yields fell as well. Tenors longer than 5 years saw a flattening in the curve while those between 1 to 3 years saw a steepening as compared to 3 months ago.
Across the board, most major CDS and OAS indices have recovered back to pre-COVID levels as the global economy continues to recover from the pandemic. The Chinese bond market remained relatively calm as data suggest that the spillover pressure from Evergrande has remained relatively contained in the onshore market. Overall, the global credit market remains relatively stable, but market sentiments has become less positive as the delta variant continues spreading quickly.
The dollar index rose by 0.5% in the first half of the month after 2.5 months of continuous decline from the start of April to the middle of June. The dollar index has been on a rise since May, bolstered by safe-haven demand, a slowing Chinese economy and the rapid spread of the Delta variant which forced some lockdowns. The Yuan’s share in global payment rose this year to the highest since 2015 with many central banks increasing their yuan holdings as well. The dollar remains the key currency for the trade of raw materials, but more firms are turning to the yuan to cater to clients in China, which is the world’s largest importer of commodities.
Brent and WTI crude oil prices dropped in the first half of the month by 8.9% and 9.0% respectively on the back of a firmer dollar and concerns that the new virus restrictions could slow down a global recovery in fuel demand. The CoreCommodity CRB Index has reached levels back in mid-2015 as the global economy recovery continues.