Market Commentary 2nd August 2021 from Charlie Hancock

Investor worries about rising Covid-19 cases and slowing economic growth faded as the week progressed. As a result, cyclical stocks in the FTSE 100, such as oil and mining companies, outperformed the broader index. Royal Dutch Shell moved 5.84% higher across the week, whilst mining giant Rio Tinto gained 2.95%.

Croda International, a Yorkshire based chemical producer, was one of the strongest performers in the FTSE 100. Croda’s share price rose by 6.15% across the week after announcing sales in the first half of 2021 rose by nearly 40%, helped by rising demand for ingredients which are used in Covid-19 vaccines.

Economic data released last week for the Eurozone was positive, with Gross Domestic Product (GDP) expanding by 2% during the 2^nd quarter of 2021. The increase in economic output was greater than expected, following a recession across the final quarter of 2020 and the 1^st quarter of 2021. Data for the German economy specifically was less encouraging, with GDP expanding by 1.5% during the 2^nd quarter. Economists were expecting a 2% increase and the disappointing growth was partly attributed to supply constraints in the manufacturing sector.

Eurozone unemployment declined to 7.7%, whilst inflation across the bloc rose to 2.2% during July from the 1.9% rate recorded in June. Energy costs were sharply higher in comparison to the same period last year, whilst other components were broadly stable and below the European Central Bank’s 2% target.

US economic data was mixed last week. Consumer confidence rose to the highest level recorded since the start of the pandemic, whilst weekly jobless claims came in worse than expected. US GDP was estimated to have increased by an annualised rate of 6.5% during the 2^nd quarter, with economists expecting growth of 8.5%. Whilst the GDP increase was below expectations, it confirmed the US economy has now fully recovered from the contraction suffered due to the pandemic.

A decline of nearly 8% in Amazon’s share price appeared to weaken investor sentiment in the US on Friday. The e-commerce giant reported revenue growth of 27% in comparison to the 2^nd quarter of 2020, but this was below analyst expectations.

The Chinese government announced a dramatic overhaul of the education and private tutoring sector, effectively forcing companies in the sector to operate as non-profit organisations. The impact on Chinese stocks was wide reaching, particularly for those with Hong Kong and US listings. Investors appeared to be concerned that similar regulatory action could take place in different industries. Officials from China’s financial regulator reportedly told a group of international asset managers and investment bankers that the changes in the education sector were not designed to be anti-market and were implemented to tackle social problems.

It appeared that rising Covid-19 cases continued to impact sentiment on Japanese equities, with new daily cases exceeding 10,000 for the first time since the pandemic started. The state of emergency in Tokyo was extended until the end of August.

Economist Gertjan Vlieghe, who is leaving the Bank of England’s monetary policy committee after a 6-year term, said that current monetary stimulus measures should remain in place for at least the next 9 months, with the economy “not out of the woods yet”.

Data showing that Eurozone inflation rose during July appeared to have little impact on yields, with fixed income investors anticipating that the rise in inflation will be temporary and the European Central Bank will keep monetary policy loose for the foreseeable future.

The Federal Reserve’s policy meeting had little impact on fixed income markets in the US, with some hawkish comments balanced out by chairman Jerome Powell stating that “substantial further progress” towards the Fed’s goals has not yet been achieved. June’s Personal Consumption Expenditures index (PCE), which is the Fed’s preferred gauge of inflation, came in lower than expected.

GBP / EUR – Current 1.1715 Previous 1.1681

Sterling moved higher against most major currencies last week, with signs that the UK’s third wave of Covid-19 infections may have peaked appearing to drive bullish sentiment amongst currency traders. The Pound gained 1.13% against the US Dollar, whilst rising by 0.29% against the Euro.