It has been a choppy week for markets, as Chinese authorities looked to extend their recent regulatory crackdown on technology companies by banning academic tuition companies from making profits, raising capital or going public.  This not only hit stocks in China, but also Chinese companies listed on the New York Stock Exchange.  However, sentiment turned positive midway through the week when US GDP data released for the second quarter disappointed, coming in at 6.5% annualised growth versus forecasts of 8.5%.  This marked a return of bad news equals good news, as expectations of any monetary tightening by the US Federal Reserve (Fed) through the tapering of their bond purchasing programme were put on hold.  By the end of the week, rising concerns over the spread of the Delta variant of Covid were once more re exerting themselves, as equity markets were decidedly soft on Friday.  This was exacerbated further following Amazon’s latest results which missed expectations, despite revenues rising a massive 27%.

As of 12pm on Friday, London time, US equities were up 0.2% over the week, whilst the US technology sector was down 0.4%. UK equities were down 0.1% whilst European equities were flat.  The Japanese stock market fell 0.2%, whilst Australian equities were also flat.  However, emerging markets lost 1.2%, although this was heavily weighted towards China, with domestic ‘A’ shares falling 4.3% and international Hong Stocks falling 5.0%.  Latin America actually rose 3.0% over the week, helped by a rally in the oil price and a weaker US dollar on the back of the disappointing US GDP figures.

No action from the Fed, despite strong US growth and rising inflation

US Treasury yields fell this week, although the chair of the Fed, Jay Powell, acknowledged that the US economy had made progress. Mr Powell expressed a wish for further progress to be made before considering tapering, with the market increasingly expecting no action until after the Fed’s September meeting at the earliest, despite rising inflationary pressures.  The 10-year yield on US Treasuries is currently trading at 1.25%, whilst German Bunds are trading at -0.45 and UK Gilts 0.57%.

Gold benefits from Fed inaction

The gold price jumped, rising 1.4% to trade at $1,831 an ounce as an environment of rising inflation against no tightening action by central banks is one in which gold has historically outperformed.  The copper price also increased, rising by 2.4% to $9,799 a tonne, but iron ore fell by over 8%, on expectations of a slowdown in China.

Issues under discussion

Markets continue to be buffeted by news on the coronavirus, despite the rapid rollout of vaccines that are much more effective than could ever have been hoped for prior to the release of their efficacy results. In truth, whilst so much of the world remains unvaccinated, the risk of a mutation that is able to evade the vaccines remains real.  However, that has not materialised to date, and increasingly what is becoming more significant is the rate of hospitalisations rather than the rate of infections, and the news on this remains much more upbeat.  Even looking to the US where the Delta variant is on the increase, the rise of infections and hospitalisations is much greater in those states that have resisted vaccinations and lockdowns to date.  The chances of the US re-entering lockdown are much less likely today than it was last year. 

Against this background, which remains difficult in respect of Covid, there remains good reason to believe that the economic recovery can continue, although rarely does anything go in a straight line.  Despite the rotation back into growth stocks in recent weeks, we continue to believe that economically sensitive stocks can make further headway this year, although the summer months may continue to be turbulent.