After a steady grind higher through the summer, global equities stumbled last week as several headwinds weighed on sentiment. Concerns over the negative impact of Chinese regulatory crackdowns hit a number of sectors, the Federal Reserve’s (Fed’s) July meeting minutes and rising concerns over the spread of the Delta COVID-19 variant were all cited as reasons for a pullback. The MSCI World Index traded down 1.4% last week, the S&P 500 Index was down 0.6%, the MSCI Asia Pacific Index was down 4.4%, and the STOXX Europe 600 Index was down1.5%.1
Chinese Policy Creates Uncertainty
Commentary from the Chinese authorities has been a major headwind. This has been impacting Asian equities for some time, but last week saw other regions impacted, too.
The technology sector remains in focus, with Tencent warning investors to expect more regulatory curbs and further noise today around data protection. However, it was the luxury space where the greatest pain was felt, and sharp losses were noted after President Xi Jinping talked about a vision of “common prosperity” that includes income regulation and redistribution. In Asia, Prada traded down 23% over the past two sessions. Luxury names in Europe were also hit hard mid-week before stabilising somewhat on Friday. Moves were painful, with Burberry down 14%, LVMH down12%, and Kering also down 17%, for example. From a European perspective, the luxury space has some of the largest market capitalisations in the region and positioning is crowded, so moves can be exacerbated.
Beverage names also came under pressure on reports Chinese regulators will hold a meeting on the liquor market, which also plays into Xi’s plan to promote healthier lifestyles. Basic resources have also suffered, with iron ore down 8% last week on concerns over China cutting steel output in the second half of this year, plus a gloomy demand outlook and stronger US dollar.
The start of this week brought some respite for the luxury space, with some analysts highlighting that while the market is focused on the potential for higher taxes, a key target of China’s common prosperity goal is to grow the middle class and that would ultimately be a driver of growth for the luxury sector.
Fed in Focus
Another reason cited for the market pullback last week was the publication of the July Fed meeting minutes. Most participants noted that provided the economy were to evolve broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year—because they saw the committee’s “substantial further progress” criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum-employment goal. However, there were caveats around uncertainty from the Delta variant, with any participants expressing uncertainty about the economic picture, citing a stalling in immunisation progress and developments surrounding the Delta variant as potential threats.
There were clearly vocal hawks, as some participants indicated that the committee should start preparing to limit the pace of its asset purchases as soon as possible.
All eyes will now be on Fed Chair Jerome Powell’s speech at the Jackson Hole conference this week on Friday, as some anticipate he will give a clear outline for the Fed’s tapering plans. This will be a key risk event for the coming week as the Fed has three more meetings left in 2021: 22 September, 3 November and 15 December. These will be key dates for the market to watch going into the year-end and some market commentaries we’ve read seem to indicate November might be the ideal time to taper.
How much the spread of the Delta variant and any potential negative economic impact plays into the Fed’s thinking will be a key factor, as US cases have risen steadily since the last Fed meeting.
Context Is Everything
While some of the mid-week moves lower in equity markets felt painful, it is important to keep these moves in context. European and US equities have been sleep-walking higher to new all-time highs through the summer on low trading volumes. So, a dose of reality was perhaps overdue as the march higher in Europe and the United States has been fairly unrelenting, although the divergence for Asia equities has been stark.
The Bank of America fund managers’ survey came out last week and highlights some interesting trends in the respondents’ macro and market outlook. Global growth expectations fell sharply, with a net 27% saying the global economy will improve, its lowest since April 2020. Despite this, equity allocation has held up, suggesting the TINA—”There is no Alternative to Equites”— remains in play.
Forthcoming German Elections
For European equities, it is important to keep an eye on the upcoming German election on 26 September. German Chancellor Angela Merkel’s CDU/CSU party union2 has lost a lot of ground in polls recently, as the public responded negatively to their handling of recent floods. With that, the outcome of the election is unclear, creating uncertainty for investors as Merkel, who steps down in September, has her heir apparent in frontrunner Armin Leschet.
However, ratings for the centre-left Social Democrats (SPD) have moved higher and the Greens support appears to have stagnated. As it stands, it is hard to see a two-party government that would have a majority, so a messy three-party solution looks likely.
From a market perspective, in our view, potentially the most negative outcome would be a leftish coalition of the Greens, the SPD and the hard-left Left Party.
There is still a month until the election, so plenty of time for polls to change, but something we need to keep on the radar in September when we already have potential headwinds from Fed tapering and the Delta variant wave.
The Week in Review
European equity markets awoke from their summer slumber to record one of their worst weeks this year, as the STOXX Europe 600 Index closed the week down 1.5%. Concern over a widening of China’s regulatory crackdown was the main driver behind the weakness. Rising COVID-19 cases in the United States and Asia also impacted sentiment through the week, which led to “Stay-at- Home” stocks outperforming reopening plays. Weaker macroeconomic data also helped drive the risk-off moves.
As noted, Fed meeting minutes were also in focus last week as investors sought any further indication on tapering. The July minutes were pretty much in line with recent Fed speak, which would be some form of tapering later this year assuming the economic recovery evolves broadly as anticipated.
In line with the risk-off theme, defensive stocks were favoured over cyclicals last week. Despite the new catalysts, market volumes continued to trend at extreme lows—this month could potentially be the worst August for volumes this century. Volatility in Europe was high last week, with the V2X Index having hit 25 early on Thursday, back near six-month highs.
Sector performance dispersion was notable last week, with defensives favoured, Utilities, the year-to-date laggard in Europe, outperformed. Naturally, health care and telecoms were also among the outperformers on the week. Meanwhile, basic resources stocks lagged; a selloff in commodity prices throughout the week was driven by a strong US dollar and Chinese data showing waning demand and an increased supply outlook. China’s steel consumption is expected to soften in the second half of the year, especially in the construction sector, due to tightening property policy.
Automobile stocks were also weak in Europe, with sentiment in the space taking a hit after Toyota announced a 40% cut to production in September due to a worsening chip shortage. As discussed, the luxury space was badly hit after Chinese state media said President Xi Jinping offered an outline for “common prosperity” that includes income regulation and redistribution, with EU luxury stocks closing the week lower as a whole. This news hit the retail sector, which also declined last week.
Sector composition mainly drove country-specific index performance. Spain’s IBEX outperformed last week, albeit down 0.9%, and helped by its weighting in utilities. Germany’s DAX closed the week down 1.1%, with its big tech and chemicals weightings balancing out a poor week for autos. The Italian FTSE MIB struggled on the week, down 2.8%, despite its large utilities weighting, driven primarily by the struggling luxury names. And it was a similar story for the regional laggard, Spain’s CAC 40, which closed down 3.9%, given its heavy luxury weighting.
After making all-time highs the prior week, US equities paused for breath last week amid the aforementioned headwinds. The S&P 500 Index ended the week down 0.6%; however, it was the move lower in the Russell 2000 Index, down 2.5% last week, that garnered the most attention as it fell through its 200-day moving average (a key technical indicator) for the first time since 2020. It did end the week just above this support level, but the move lower is taken as an indicator of the nerves over the spread of the delta variant and potential Fed tapering.
In terms of sector performance, there was a defensive tilt to the outperformers with utilities and health care higher, while energy and materials closed lower.
Looking at macro data, US retail sales came in at -1.0%, missing estimates as the resurgence of the pandemic had a negative impact.
Last week was tough for Asian equities with the MSCI Asia Pacific down 4.4%. The week got off on the wrong footing with poor Chinese macro data; industrial production for July was up 6.4% year-over-year (Y/Y), but that figure was weaker than expected amid continued disruption from recent flooding and Delta-variant outbreaks. Retail sales were up 8.5% but also missed expectations, with the outlook challenged given further COVID-19 outbreaks hitting the services and travel sectors this month.
As discussed above, Chinese government rhetoric weighed on a variety of sectors including basic resources, luxury and technology. On the back of this, we saw Hong Kong’s Hang Seng Index enter bear market territory as it has traded down 20% since its February peak.
COVID-related headlines in the region were mostly negative, with Australia struggling to get a grip on the recent outbreak of new cases in Sydney and New Zealand entering a lockdown after an Auckland outbreak. In Vietnam, Ho Chi Minh City entered a two-week lockdown. On the flip side, it was positive to see China reporting zero locally transmitted cases today (23 August).
One impact from the COVID-19 restrictions in China is a major shipping bottleneck. China’s ports have been shut down or restricted due to COVID—China has eight of the 10 busiest ports in world, and they are running at well below normal capacity because of the restrictions. The knock-on impact on the global supply chain could be significant, and shipping costs have soared.
The Week Ahead
Macro Week Highlights
As discussed, Fed Chair Powell’s commentary at the Jackson Hole conference will likely be a key catalyst for equity markets this week. Elsewhere, the spread of the Delta variant and bottlenecks in global supply will be important drivers for sentiment. Commentary from Chinese authorities will be closely watched after the fallout last week.
Monday 23 August: Euro Area Flash Composite Purchasing Managers Index (PMI); UK Flash Composite PMI
Wednesday 25 August: Germany Ifo Survey
Thursday 26 August: European Central Bank Monetary Policy Accounts
Monday 23 August
UK: Markit/CIPS UK Services PMI; Markit/CIPS UK Composite PMI; Markit UK PMI Manufacturing SA
US: Chicago Fed Nat Activity Index; Markit US Manufacturing PMI; Markit US Services PMI; Markit US Composite PMI; Existing Home Sales; Existing Home Sales month-over-month (M/M)
France: Markit France Manufacturing PMI; Markit France Services PMI; Markit France Composite PMI
Germany: Markit/BME Germany Manufacturing PMI; Markit Germany Services PMI; Markit/BME Germany Comp PMI
Eurozone: Markit Eurozone Manu PMI; Markit Eurozone Services PMI; Markit Eurozone Composite PMI; Consumer Confidence
Tuesday 24 August
US: Richmond Fed Manufacturing Index; New Home Sales; New Home Sales M/M
Germany: Gross Domestic Product (GDP); Private Consumption quarter-over-quarter (QoQ); Import Price Index
Wednesday 25 August
US: MBA Mortgage Applications; Durable Goods Orders; Durables Ex-Transportation; Cap Goods Orders Nondefence Ex Air; Cap Goods Ship Nondefence Ex Air
Germany: IFO Expectations; IFO Current Assessment; IFO Business Climate
Thursday 26 August
US: Initial Jobless Claims; GDP Annualised Q/Q; Continuing Claims; Personal Consumption; GDP Price Index; Core PCE Q/Q; Kansas City Fed Manufacturing Activity
France: Business Confidence; Manufacturing Confidence
Germany: GfK Consumer Confidence
Italy: Industrial Sales M/M; Industrial Sales WDA Y/Y
Friday 27 August
US: Advance Goods Trade Balance; Wholesale Inventories M/M; Retail Inventories M/M; Personal Income; Personal Spending; Real Personal Spending; University of Michigan Sentiment
France: Consumer Confidence
Germany: Retail Sales M/M; Retail Sales NSA Y/Y
Italy: Consumer Confidence Index; Manufacturing Confidence; Economic Sentiment
Spain: Total Mortgage Lending Y/Y; House Mortgage Approvals Y/Y
Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC, member FINRA/SIPC, is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
What Are the Risks?
All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
Past performance is not an indicator or guarantee of future performance. There is no assurance that any estimate, forecast or projection will be realised.
Links to External Sites
Franklin Templeton is not responsible for the content of external websites.
The inclusion of a link to an external website should not be understood to be an endorsement of that website or the site’s owners (or their products/services).
Views You Can Use
Conditions have been ripe for Southeast Asia’s e-transformation, and COVID-19 has acted as an accelerant, according to Claus Born and Yi Ping Liao of Franklin Templeton’s Emerging Markets Equity team. They see three secular growth opportunities that stand out for investors: e-commerce, fintech and gaming. Read More.
Ed Perks, CIO of Franklin Templeton Investment Solutions, outlines what factors should likely support economic growth, how he views inflation, why US equities remain attractive, and where income-seeking investors should look for potential opportunities. Read More.
Mutual Series Portfolio Managers Katrina Dudley and Mandana Hormozi discuss why Europe deserves renewed attention. They believe newfound stability and unity of the region, its pioneering use of regulation and environmental initiatives and accelerating vaccine rollout provide Europe scores of return potential. Read More.
China is in the midst of a tightening regulatory cycle which has led to some investor uncertainty and heightened market volatility. Our Chief Market Strategist, Stephen Dover, discusses China’s aspirations to increase economic growth while also providing social fairness and stability. Read More.
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. CDU/CSU, unofficially is the union parties’ political alliance of two political parties in Germany: the Christian Democratic Union of Germany (CDU) and the Christian Social Union in Bavaria (CSU).