It was a volatile week for equity markets, with major indices falling sharply on Monday, before recovering as the week progressed. Falls were precipitated by the perceived threat of the Delta coronavirus variant curtailing global economic growth, as case numbers continued to rise globally. Europe recorded its biggest one day loss of the year, falling on Monday by 2.3%, whilst the US main market fell by 1.6%. However, this soon reversed with investors re-focusing on the strong corporate earnings results in the US and Europe. Several strong earnings results helped lift investor sentiment, with Coca-Cola, advertising group Interpublic and telecom giant Verizon beating consensus estimates set by analysts.
As of 12pm London time, the US market recovered to finish the week in positive territory by 0.93%. Likewise for Europe and the UK, both markets recovered over the week to finish up by 1.23% and 0.52% respectively. In contrast, equities struggled in regions where the outlook is less clear due to lower vaccinations rates, especially in Asia and Emerging markets. The Hong Kong index finished lower by 2.44%, whilst in Japan the market was down by 1.44%. The Emerging Market index also finished the period 1.02% lower.
European Central Bank (ECB) maintains accommodative monetary policy.
The ECB decision to remain committed to buying eurozone bonds and keeping interest rates at historic lows also helped European equities recover towards the end of the week. The central bank pledged to maintain its pandemic emergency purchase programme until at least the end of March 2022, estimating the coronavirus crisis phase to be over then. It is currently purchasing €80bn a month of Eurozone bonds.
Strong European economic data, but a mixed picture in the UK.
The Markit Flash Composite Purchasing Managers’ Index (PMI), a gauge of economic activity, posted strong readings this week for the Eurozone. The survey climbed to 60.6 in July, from 59.5 in the previous month, the highest reading since July 2000. The result was far ahead of the 50 level which separates growth from contraction. The services sector in particular is enjoying the freedom of loosened COVID-19 containment measures. However, it will remain to be seen if this strong data can be maintained, especially with the Delta coronavirus variant spreading across the continent.
Data was more mixed in the UK. Retail sales beat forecasts, with a rise of 0.5% beating estimates of 0.4%. In particular, food and drink shopping was boosted by the Euro 2020 football championship. However, PMI data for the UK showed a moderation in activity, with the composite PMI of 57.7. Although the reading is still above 50 indicating economic expansion, the reading is at a four month low and below the consensus forecasts of 62. The lower survey reading has been attributed to staff and raw material shortages due to rising coronavirus cases.
Bonds rally due to initial global coronavirus fears.
In contrast to equities, investors sought the haven assets of core government bonds. The yield on the US 10-year, which moves inversely to its price, tumbled by 10 basis points on Monday, to 1.19%, the lowest level since mid-February. Equivalent 10-year German bund and 10-year UK Gilt prices also rallied with yields falling to five-month lows. As equity markets recovered throughout the week, the rally in government bonds moderated, with the US 10-year treasury finishing the week trading at 1.27%. 10-year German bund and 10-year UK Gilts ended the period at -0.41% and 0.58% respectively.
OPEC+ finally agree to production deal.
The Brent crude oil price shed 7% on Monday alone, as economic growth concerns were compounded by OPEC (Organization of the Petroleum Exporting Countries) and its allies finally agreeing to increase supply in response to soaring prices. Initially OPEC+ will pump an extra 4,000,000 barrels a day each month from August. These monthly production increases will continue until December 2022.
After the initial shock on Monday, prices recovered steadily through the week and in fact managed to finish slightly higher by 0.22% to finish trading at $73.75.