Market Review 07/2021

In July, worries about rising inflation, Covid-19 Delta variant outbreak and declining growth in some regions continued to spread in financial markets. Nevertheless, so far more than 80% of US companies beat their second-quarter earnings estimate forecasts. Worse situation was in Chinese stock markets, where new restrictions in the education sphere scared investors and made them trim their positions.

Commodity prices are easing; manufacturing sees a decline

Manufacturing activity continued to slow down – in US, ISM Manufacturing PMI fell to 59.5 in July compared to 60.6 in June, which is the lowest level in past six months. China’s factory activity also decreased in July – The Caixin China General Manufacturing purchasing managers’ index decreased by one point to 50.3 and was negatively impacted by higher material cost, increasing number of Covid-19 cases and extreme weather.

In US, another ISM survey that measures prices paid by manufacturers decreased to 85.7 in July compared to 92.1 in June, suggesting that commodity prices are easing. Due to concerns about inflation, US consumer sentiment decreased in July – The University of Michigan’s Consumer Sentiment Index decreased to 81.2 compared to 85.5 reading for June. According to Labor Department data, US state unemployment decreased, however there are threats of renewed restrictions that could hurt labor market. Meanwhile, the economy grew at an annualized rate of 6.5% in the second quarter.

Eurostat’s initial estimate showed Eurozone expanded by 2% quarter-on-quarter. Compared to the same period a year earlier (Q2 2020), GDP increased by 13.7%. In addition, inflation increased to 2.2% in July compared to the 1.9% in June – the highest rate we saw since October 2018. Estimates from the European Commission showed that Eurozone economic sentiment increased to a record high 119 points.

European and US equity markets

Concern is visible in stock markets across the globe

Despite a slight correction in the middle of the month, equity markets continued their winning streak with S&P 500 adding another 1.8% to its value. Lower growth was observed in Europe where Stoxx 600 rose by about 1%. The focus of this month was on the outbreak of the Covid-19 Delta variant, with 24% increase in the number of cases worldwide and more than 600% increase in the United States. Currently, the main centers of the outbreak are regions with smaller vaccination rates. Even more worrying was the fact that Pfizer/BioNTech vaccines achieved only 39% effectiveness against the new strain. USA and major European countries are already discussing possibility of introducing new restrictions, if the current situation does not improve. Interesting situation was observed in China. Due to certain business practices and unauthorized data collection, as well as poor working conditions, major Chinese companies received huge fines. In July, government continued with private education sector by introducing various restrictions in order to achieve higher social equality. Overall, China’s SZSE Composite index price fell about 5% over the course of a month.

Benchmark 10-year bond yields

Bond yields continue to decline

In July, investors continued to pile in fixed income securities, thus, US 10-year government bond yields continued to decline. Similar situation was with German bund yields and government debt of other major economies.

Market participants eagerly awaited new signals about possible changes in the current monetary policy from Federal Open Market Committee meeting. At the press conference on July 28, Federal Reserve chair Jay Powell said that the US economy had made relatively good progress, but as long as the Fed targets were still not met, both interest rates and existing asset repurchase policies would not change. There was no clear reaction in the stock markets, but precious metal reacted positively. On the contrary, dollar slightly weakened with EUR/USD reaching 1.1875 mark.

High Yield bond Indexes

FX volatility non-existent; precious metals still disappoint

Another month and still no sign of any trend – we have been saying this excessively often, but this is what it is – FX volatility is near record lows. EUR/USD tested levels below 1.1800 and bounced back above 1.1900 and it is hard to tell for how long we are stuck in this region.

Gold and silver showed a retreat in the middle of the month. Gold fell from 1890 dollars per ounce to 1770, later recovering to XAU/USD 1800-1820. Silver also fell from $26.3 an ounce and broke $25 mark to the downside. Overall, larger short-term direction in precious metals is still unclear, but silver might have better chance to lead the rally no one believes in anymore. Technically, we have everything in place to suggest that we are ready to break out to the upside, but in that case, silver price must not go below 23.50 dollars per ounce. Another move above XAG/USD 29-30 mark adds to a potential move to $40 and beyond.

Gold price, USD/oz

The importance of taking profit

Lumber is a hot topic for many months now and along with copper prices is one of the main participants in inflation talks. Lumber has been trading in USD 200 to 500 per 1000 board feet (mbf) range for decades before Covid-19 saga lifted prices close to USD 1700 per mbf. Normally it is only a matter of time when demand is satisfied or supply is adjusted accordingly and prices collapse as fast as they rose (price drop actually is steeper that rise). We hit lower USD 500s in mid-July and are trading above USD 600 per mbf at the time of writing. Old saying goes – «one cannot go bankrupt by taking profit», which means that however psychologically hard it is to sell in rising market, locking-in profit is very important.