1H July Global Market Recap
1st July 2021 – 15th July 2021
U.S. headline inflation rate accelerated to 5.4% in June from 5% in May, reaching a record high since August 2008, and well above consensus of 4.9%. Used cars continued to be the largest driver of inflation. The U.S. non-farm payroll has seen the strongest job growth in 10 months, adding 850k new jobs in June, well above market consensus of 700k. Altogether, the U.S. economy is still 6.8 million jobs short of its pre-pandemic levels from February 2020. China’s Caixin Manufacturing PMI dropped to 51.3 in June from 52 in May, falling short of market expectations of 51.8. China’s headline CPI unexpectedly dropped to 1.1% in June, down from an eight-month high in May and below market forecasts of 1.3%, owing to a significant reduction in food prices (-1.7% vs. 0.3% in May), as prices of pork fell faster.
Fed officials maintained the tone that faster than anticipated economic recovery was not sufficient to fulfill the Fed’s goal of “substantial forward progress” to exit the current asset purchasing program and trigger interest rates hikes. Investors appeared to be satisfied with the Fed’s dovish stance and the reaction in the U.S. stock market to the inflation hikes was subdued. All three major indexes registered gains in the first half of July. The S&P 500 rose 1.5%, the blue-chip Dow gained 1.4% while the Nasdaq increased by 0.3%. CSI Small Cap Index and Shenzhen’s start-up board ChiNext Composite index were leading the global market by rising 1.8% and 1.7% respectively, supported by strong exports data. Hong Kong's benchmark Hang Seng index fell by 2.9% with increase pressure from Chinese tech giants as Beijing continues to crack down on monopolistic practices.
The 10-year U.S. treasury yield decreased by 16.91bps in the first half of the month, as investors grew concerned about the shape of the economic recovery amid hot inflation readings and the spread of the Delta variant. The PBOC cut the reserve requirement ratio (RRR) by 0.5% for most banks and it is the first reduction since the pandemic last year. The cut is set to release one trillion yuan of long-term liquidity into the economy.
Overall, the global credit market remains relatively stable, but market sentiments has become less positive as the Delta variant continues spreading quickly. China’s credit expansion rebounded in June as authorities may allow looser credit policy with the economic recovery slowing down. The government also indicated that monetary stimulus will be stepped up as the second quarter GDP came in slightly below expectations, increasing by 7.9% against estimates of 8.1%.
The dollar index climbed to a three-month peak in a flight-to-safety bid, as investors remained anxious about a fast-spreading Delta variant that could throttle global growth. The Chinese central bank released a white paper titled “Progress of Research & Development of E-CNY in China” for its upcoming digital yuan, which would be deemed as a legal tender in the country and would play a key role in the retail payment market.
Brent and WTI crude oil prices dropped in the month by 2.2% and 2.5% respectively after an OPEC+ agreement to boost output stoked fears of a surplus coupled with the rising Delta variant infections. The CoreCommodity CRB Index hit a 6 year high with the index reaching levels back in mid-2015. Chinese authorities are signaling that they plan to double down on measures launched in recent months to cool commodity markets that have been buoyed by economic recoveries around the world.