Fears of turbo charged growth leading to rising inflationary pressures, gave way to fears that the growth recovery has peaked in the US, coinciding with a slowdown in China, as US Treasury yields, having hit 1.77% in March, fell to 1.25% on Thursday, a level not seen since February. Stocks associated with reflation tumbled with it, with banks, car manufacturers and energy companies being some of the hardest hit areas. Whilst the darlings of the pandemic shone, with food retailers, healthcare and technology companies all making gains. By Friday, equities, led by Europe, began to recover as the US Treasury yield, which moves inversely to price, bounced off its low, now trading at 1.34%.
Eurozone service sector recovery
The week began with the latest purchasing managers indices for the services sector being released for the Eurozone, a well-respected survey of the operating environment companies find themselves in versus the previous month. The reading came in at 58.3 for June, with any number above 50 representing expansion. This was the highest level since July 2007 and was boosted by strong readings from Spain and Italy in particular. Brent crude oil rallied to $77.8 a barrel as OPEC (Organisation of the Petroleum Exporting Countries) failed to reach a decision on whether to increase output.
Peak growth in the US?
However, against this, the US non-farm payroll figures released last Friday, although stronger than forecasted at 850,000 new jobs added in June, were not at a level expected to create a policy shift towards tightening from the US Federal Reserve. This was followed by the release of the Institute for Supply Management’s (ISM) survey of the service sector in the US which came in at 60.1 which, although strong, was beneath both the previous months’ figure and expectations.
Then on Thursday, the Chinese government said it would use cuts in bank reserve ratio requirements to keep money flowing around the economy. Investors took this to mean that the second quarter GDP numbers due to be released next week might fall short of expectations. This, combined with the weaker US ISM number prompted investors to sell out of economically sensitive positions and reach for the safety of government debt. In addition, the rapid spread of the Delta variant of Covid has increasingly weighed on investors’ growth expectations for the remainder of the year.
Reflation stocks fall the hardest
As of 12pm on Friday, London time, US equities fell 0.7% over the week, whilst the US technology sector dropped 0.5%. European equities lost 0.2% and the UK was down 0.5%. Japanese stocks dropped 2.3%, although the Japanese Yen rallied by close to 1% versus major currencies, acting as a partial hedge for overseas investors, whilst the Australian stock market fell 0.5%. Emerging markets lost 2.9%, whilst Latin America fell 4.8% and Hong Kong stocks fell 3.4%.
Government bonds and gold rally
Similar to US Treasuries, German Bunds yields (which move inversely to price) fell by -0.34%, now trading at -0.30, and UK Gilt yields fell by 0.55%, now trading at 0.65%. Gold’s haven status returned, as it rallied by 1.0%, back up to a price of $1,801 an ounce.
OPEC indecision leads to crude oil weakness
Brent crude, having almost touched $78 on Tuesday, fell to $72.4 before recovering some of its losses, now trading at $74.7.