2H August Global Market Recap
16th August 2021 – 31st August 2021
Macro: The U.S. Markit flash composite index dropped to 55.4 in August from 59.9 last month, amid a backdrop of material shortages, a labor shortfall, and an increase in coronavirus infections. U.S. retail sales declined 1.1% in July which was below expectation and mostly due to a sharp dip in vehicle sales. Jerome Powell mentioned at the Fed's annual economic symposium that the timing and speed of tapering should not be seen as a signal for when interest rates would begin to increase, a statement the market saw as dovish since it will keep credit cheap. China's rapid economy recovery is losing steam as firms struggle with increased costs and supply constraints. China’s official Manufacturing PMI fell 0.3 to 50.1 in August, while service PMI dropped sharply to 47.5 and slipped into the contraction territory. Rise in COVID-19 infections in July prompted new restrictions, disrupting manufacturing productivity which had already been hampered by harsh weather this summer. Industrial production and retail sales grew by 6.4% and 8.5% year on year in July, with both missing expectations of 7.8% and 11.5% respectively. Moving forward, we believe the service sector may recover as temporary unfavorable factors subside and there may be more room for policy easing especially from the fiscal side of things.
Stocks: As the rise of the delta variant, supply chain constraints and inflation concerns continue, U.S. stocks advanced for a seventh consecutive month, the longest winning streak since January 2018. The strong month came on top of robust corporate earnings in the second quarter and the Fed’s dovish stance. The broad market index gained 2.9% in August, while the Nasdaq Composite and The Dow Jones Industrial Average traded up 4% and 1.2% this month respectively. In China, large-cap blue chips and growth plays have been underperforming since the beginning of August due to the disappointing July economic data. The A-share market recovered in the last weeks of the month as concerns over regulatory policies and slowing economic growth were progressively factored in. Average daily turnover in August remained above Rmb1 trillion, climbing to Rmb1.3-1.4 trillion in the last week of the month. Profit growth remained robust overall in first half of the fiscal year. Overall, A-share ROE continues to increase, owing mostly to higher asset turnover. The SHCOMP and CSI 500 gained 4.3% and 7.2% respectively in August, while the CSI 300 index and ChiNext lost 0.1% and 6.6%, respectively.
Rates: The 10-year U.S. treasury yield increased by 8.65bps in August, as the U.S. FDA granted full approval for the Pfizer-BioNTech Covid vaccine, which could help to boost the economic recovery. The People’s Bank of China has not changed the interest rate on its medium-term lending facility and the loan prime rate since April 2020. The government signaled worries over weak credit demand and economic slowdown, and is urging more lending to boost credit, especially to MSMEs. Premier Li Keqiang also discussed the need to guide financial institutions to use the RRR cut to support small and midsize companies.
Credit: The Chinese government’s push to wean property developers from excessive borrowing is spilling over into loan losses at banks and pain in the credit market. Much of the volatility that has recently shaken China’s credit markets has been associated with government interventions. China’s policy agenda involves a delicate balance between opening its economy and capital markets and maintaining social stability. Recent policy strands led to a dramatic sell-off in stocks and in the offshore Chinese currency and credit markets. Overall, the global credit market remains relatively stable, but market sentiments has become less positive as the delta variant continues spreading quickly.
FX: The dollar index rose by 0.5% in August 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. China’s cross-border settlements denominated in yuan accounted for 47.4% of all domestic and foreign currency transactions last year, 9.28 percentage points higher than 2019.
Commodities: Brent and WTI crude oil prices dropped in August by 4.4% and 7.4% respectively on the back of a firmer dollar and concerns that the new virus restrictions in Asia, especially China, could slow down a global recovery in fuel demand. The rise in natural gas prices this year is due to soaring LNG exports and rising domestic natural gas consumption for sectors other than electric power. The CoreCommodity CRB Index has reached levels back in mid-2015 as the global economy recovery continues.