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Article | 13 July 2021 | Investments
Global equities were hit by volatility mid-month, as news broke that the Fed could taper its stimulus programme by year-end, but recovered to finish August higher. US stock markets touched new highs during the month, and the S&P 500 rose 2.9%, reaching double the level of its pandemic low. European markets ended the month higher as investors weighed the economic recovery and increasing vaccination rates against the spread of the Delta variant. The Euro Stoxx 50 rose 2.6%, while the FTSE 100 gained 1.2%. Emerging market returns were more mixed, and it was a particularly volatile month for Chinese stocks, as the Chinese government continued to implement strict new regulations.
US Treasury yields rose slightly over August (and prices fell). This was despite yields falling in the aftermath of the Jackson Hole Symposium at the end of the month, where Fed chair Jay Powell gave no further hints of stimulus tapering. Eurozone government bond yields also rose over the month, on concerns that the European Central Bank could rein in its bond purchases. Investment grade corporate bond yields were higher in the US and Europe, while high yield bond yields were lower on both sides of the Atlantic. Emerging market debt yields also fell.
Worries over the spread of the Delta variant saw investors move into perceived safe haven currencies, such as the US dollar and Japanese yen, in August. The US dollar was stronger across the board, shaking off weak US consumer data and a lack of clarity on the timing of future stimulus reductions. The yen rose against the euro and sterling. The euro rose against sterling but fell against the dollar and the yen, while sterling was weaker against its major counterparts.
Commodities such as oil and iron ore sold off mid-month, on concerns that demand from China would fall – both from the spread of the Delta variant and from the country’s plans to reduce carbon emissions. Markets recovered in the second half of August, as the Chinese government reported no new local Covid-19 cases, but the price of Brent Crude oil still finished 4.4% lower at $73. Elswhere, the price of gold finished August roughly where it started, at $1,813 per ounce.
The spread of the Delta variant pushed the VIX index of stock market volatility to a peak of 21.7 during August, but the so-called ‘fear gauge’ subsequently cooled off to finish the month 9.6% lower at 16.5.
The UK government announced plans to kick-start a hydrogen economy as part of its efforts to reduce carbon emissions. The plan should create 9,000 jobs and unlock £4 billion ($5.5 billion) of investment by 2030. Hydrogen does not produce carbon dioxide when burnt, so it is seen as a cleaner alternative to fossil fuels. The gas has gained interest from governments and policymakers across the globe as the need to reduce emissions becomes more urgent.
China continued to impose its regulatory clampdown on a widening spread of sectors, from education and tech, to prescription medicine and alcohol, with a view to enhancing ‘common prosperity’. Equities in the targeted sectors fell sharply in response.
Supply chain constrictions continued, although commodities drove global trade to an all-time high. Toyota announced a 40% reduction in global car production for September, as semiconductors remained in critically short supply.
The Delta variant of Covid-19 continued to spread rapidly across the globe, impacting growth forecasts and consumer confidence. In its July Federal Open Market Committee minutes, published in August, the US Federal Reserve (Fed) specifically noted the Delta variant as a risk.
The September meeting of the US Federal Reserve has long been expected to outline a plan for the tapering of pandemic-era stimulus. Data announcements in the intervening period will be closely weighed by markets and other central banks.
China’s policymakers are expected to announce new stimulus measures in response to the loss of momentum caused by recent Covid-19 restrictions and tighter regulation, as the Caixin Manufacturing PMI dips below 50.
The German elections on 26 September will bring an end to the 16 year rule of Angela Merkel. The Green Party is predicted to perform strongly, forming part of the next government, while Merkel’s CDU party could potentially be voted out of power.