The Digest
Global equities were mixed last week across the regions, reflecting unwinds and relative exposures to value versus growth. US equities rallied through the week into the long holiday weekend, with the S&P 500 Index closing up 1.7%. European equites finished roughly flat after a mid-week unwind over month and quarter end. Meanwhile, Asian equities lagged, with the MSCI Asia Pacific Index closing the week down 1.5%.1 COVID-19 themes were evident as fears regarding the spread of the Delta variant hit investor sentiment given potential travel restrictions. Repositioning was also a clear driver for markets through a week which straddled quarter-end. However, volumes were poor—25% below the year-to-date average.
Delta Variant Concerns in Europe
As we noted last week, COVID-19 cases have risen quite dramatically in the United Kingdom over the last few weeks as the Delta variant continues to spread. Infections have risen sharply since the decline in early May; however, the young and uninoculated remain the key demographic in the positive cases. Infections among people who have received both jabs of a vaccine (likely 50 years old and above) have not risen significantly. The United Kingdom does continue to test significantly more than other countries and hospitalisations remain at relatively low levels, meaning the medical system is far from any signs of stress that would require increased restrictions. Based on government commentary, most of the remaining restrictions are on track to be eased on 19 July. It appears that as long as the vaccines continue to work, the risk of any further economic setback remains low. The United Kingdom does appear to remain on track for a rapid economic recovery, with a solid rebound expected through the second half of this year.
Whilst the United Kingdom is the test case at present for the COVID-19 vaccination programme, there are concerns around Europe that infections may start to edge up again as regional variations begin to spread. There is nothing yet to suggest that economic growth in Europe is at risk, but there is uncertainty on what kind of impact the spread of the Delta variant would have around Europe, where a smaller percentage of the population are even partially vaccinated. Europe is roughly 6 weeks behind the United Kingdom and the number of infections in parts of Europe have shown signs of ticking higher and the Delta variant is already dominant in Portugal. In France and Spain, 20% of infections are of the Delta variant. However, as this variant spreads, vaccination progress is expected to pick up speed too, meaning that a higher percentage of the population of the eurozone may be vaccinated than was the case at the same stage of the cycle in the United Kingdom. This should hopefully keep economic growth in Europe on track and avoid any harsh new restrictions.
Quick First-Half 2021 Recap
We thought it would be useful to quickly recap some of the overall moves we saw over the first six months of the year.
In the first half of the year, we saw clear rotation into cyclicals and value stocks and away from the previously dominant secular growth industries such as technology, “stay at home” and renewables, which led the market last year. Strong growth, rising commodity prices and rising inflation expectations have aided this move. The European banks have led the way, with the STOXX Europe 600 Banks Index up 23.8% on the year—eurozone banks specifically are up 27%. Utilities are the only sector to finish the first half of the year in the red, down 2.9%.2 There has been a significant disconnect between the performance of energy stocks in the United States and Europe. US energy stocks are up 42% (the best-performing sector stateside), whilst the sector in Europe finished the first half of the year up just 10%. Persistent inflows have kept equity markets resilient.
Within Europe, the United Kingdom has lagged, with the FTSE Index up 9% in the first half of the year, but the region is benefitting from multiple backdrops, including relative political stability and a skew towards domestic consumption.
Week in Review
Europe
European equities largely recovered from an end-of-quarter blip to finish last week down just 18 basis points.3 The month-end and quarter-end market unwinds last Wednesday injected a little bit of life into equity markets on what was a relatively quiet week. Market volumes remain low, roughly 25% below the year-to-date (YTD) average. Volatility rose 15% last Wednesday, with the V2X hitting 19.50.4 The consensual reflation trade was unwound into month-end, as year-to-date winners were sold through the early part of the week. Focus then was on the latest US June Nonfarm payroll number, which came in at 850,000, which was higher than expected. Equity markets have been on a rather steady grind higher through June but there is still some nervousness out there. There are fears that macro data has peaked, growing concerns on whether the Delta variant will spread across Europe, and, finally, central bank rhetoric remains a key focus as investors look for any hints of tapering.
There were a couple of themes to pick out throughout the week. COVID-19 travel fears continued to weigh on travel and leisure stocks, which were lower last week. There’s no respite there with the latest holiday company TUI bond issuance unsettling investors and acting as a reminder just how liquidity-constrained many travel/leisure names remain and how uncertainties remain high. Also, on the reopening theme, Goldman Sachs’ Going Out basket was down 1.8% on the week, whilst the equivalent Stay at Home basket rose 1.5%. The banks lagged overall after a late selloff driven by the yield outlook. In terms of the outperformers, media outperformed, up on the week, along with chemicals and health care.
United States
US indices managed gains of more than 1% across the board in what was a relatively quiet week heading into the Independence Day holiday weekend. The only real catalysts for the week were the ADP Employment Change and the June employment report, both of which did not disappoint. Despite all the positive data, stocks have been trading in a very tight range. These tight trading ranges continue to drag historical realized volatility lower, the lowest level seen since the beginning of 2020. With that said, US stocks recorded their second-best first half of the year performance in over 20 years, with the S&P 500 Index up over 14.4%.
US non-farm payrolls were the main focus from an economics perspective last week. In the end, the print for June, while better-than-forecast (strength from services & government), is still within the ballpark of expectations. As such, it is unlikely to fire up the market’s imagination as it doesn’t suggest “substantial further progress” in labour-market improvement. This print argues for yields to tread water with a downward bias and for stocks to continue to be supported. The unemployment rate was higher than expected, which may worry the Federal Reserve (Fed). Various Fed speakers have outlined in recent weeks that employment may be as much as 10 million below pre-COVID-19 levels, and the data for June marks incremental progress without suggesting any quantum leap. In other words, there is no impetus to push the taper timeline forward.
The S&P 500 Index posted a fifth straight quarterly gain in the second quarter in the wake of the 20% drawdown in the first quarter of 2020. The central bank liquidity tailwind continued to act as one of the more powerful forces for risk assets, with the combined G5 central bank balance sheet at US$30 trillion+. The Fed’s balance sheet topped US$8 trillion late in the second quarter, up from US$4.1 trillion at the start of 2020. Fiscal stimulus lingered as another high-profile theme, estimated at US$17 trillion globally. Pent-up demand and vaccine traction (over 50% of US adults have received at least one shot) drove reopening momentum. Another earnings season of outsized positive surprises and expectations for 30%+ S&P earnings growth in 2021 also fed into the bullish narrative. Inflows were another positive. Retail buying and corporate buybacks also helped, although discretionary corporate buybacks are winding down as we head into earnings season.
Asia and Pacific
Asian equities sold off last week, with the MSCI Asia Pacific Index closing the week down 1.5%. A subdued week in Japan saw the Nikkei closing down 1%. Year-to-date winners—the likes of reopen trades and financials—underperformed. The increased media coverage on the Delta variant and COVID-19 cases spiking globally may be another reason why Japan struggled, especially given the Tokyo Olympics is kicking off in just three weeks. COVID-19 vaccination speed continued to improve, with companies now starting to have on-site inoculation. Confidence among Japan’s manufacturers improved for a fourth quarter, rebounding to the highest level since 2018. The Bank of Japan’s Tankan Survey showed sentiment at big product makers rose nine points to 14 in June, a touch behind expectations.
Hong Kong’s Hang Seng Index closed down 3.3% on the week with both Hong Kong and China Connect closed on 1 July for SAR Establishment Day. Hong Kong only opened for a half-day trading this morning amid a rainstorm warning. The Hang Seng Index topped 29,300 resistance levels and pulled back as more infections Delta variant put recovery on hold, and overshadowed technology’s strength given Facebook’s winning of anti-trust lawsuits the previous weekend.
Week Ahead
Monday 5 July
- UK new car registrations
- European Central Bank’s (ECB’s) Luis de Guindos speaks
- China Caixin composite and services Purchasing Managers Indices (PMIs)
- Japan composite and services PMIs
- Australia composite and services PMIs, retail sales
- US market closed for Independence day holiday
Tuesday 6 July
- Germany factory orders, ZEW
- Eurozone retail sales
- Global final composite and services PMI
- ECB’s Pablo Hernandez de Cos speaks
- Vienna energy forum
- Reserve Bank of Australia monetary policy
- US: (June) ISM services
Wednesday 7 July
- Germany industrial production (IP)
- France trade balance, current account balance
- Italy retail sales
- European Commission publishes summer forecast
- Vienna energy forum
- China foreign reserves
- US Federal Open Market Committee meeting minutes
- US: (May) Job Openings and Labor Turnover Survey
Thursday 8 July
- ECB minutes
- UK RICS house prices
- Germany trade balance
- France Bank of France industry sentiment
- Bank of England (BoE) bank liabilities/credit conditions surveys
- Japan current account, trade balance
- US Department of Energy Data
- US: initial jobless claims, consumer credit
Friday 9 July
- UK Monthly GDP, Industrial Production (IP), trade balance
- France IP
- Italy IP
- China consumer price index (CPI)
- Istat releases the monthly economic note
- BoE’s Andrew Bailey, ECB’s Christine Lagarde speak on panel
- G20 finance ministers and central bankers meeting
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1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
2. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
3. One basis point is equal to 0.01%.
4. The Euro STOXX 50 Volatility Index (V2TX) measures implied volatility of near term EuroStoxx 50 options, which are traded on the Eurex exchange. Indices are unmanaged, and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance.