VIDEO: Market Snapshot August 2021
Our Market Snapshot provides an overview of key events that influenced financial markets over the course of August 2021.
Global equity markets were broadly positive in August, supported by the US Federal Reserve’s dovish stance on the tapering of asset purchases, while downplaying concerns over a potential interest rate increase over the short term. Concerns over a slowdown in global growth and a sharp spike in new Covid-19 infections weighed on sentiment somewhat, as did weaker-than-expected economic data coming out of China. In South Africa, equities underperformed as declines in the Industrial and Resource sectors weighed on the local bourse, although investors welcomed the appointment of Enoch Godongwana as the country’s new finance minister.
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 2.5% for the month. Emerging markets outperformed developed markets, with the MSCI Emerging Markets Index delivering 2.6% and the MSCI World Index returning 2.5%. The Bloomberg Global Aggregate Bond Index (US$) returned -0.4%, while the EPRA/NAREIT Global Property REIT Index (US$) produced 1.6%.
The spot price of Brent crude oil closed the month 0.6% lower at around US$72 per barrel as investors pulled back over concerns over weakened global demand. Turning to commodities, metals were mostly negative with gold returning -1.0%, platinum -5.1%, copper -2.9%, palladium -6.2% and nickel -1.9%. Aluminium was among the only outliers, gaining 3.4% for the month.
In the US, the Federal Reserve (Fed) signalled that it would likely begin tapering its $120 billion monthly asset purchases before the end of the year, but that doing so would not carry a direct increase in interest rates. The central bank added that it would continue to keep its federal funds rate steady until the economy reaches conditions consistent with maximum employment, and inflation is on track to moderately exceed 2%.
The Fed’s dovish stance helped lift equity markets, with the S&P 500 and Nasdaq reaching record highs, supported by strong corporate results, a sharp rebound from tech stocks, and the prospect of increased vaccination rates following the full FDA approval of Pfizer’s Covid-19 vaccine. Investors also welcomed the news that the US Senate had passed President Biden’s $1 trillion bipartisan infrastructure bill, which is expected to help boost economic recovery.
Turning to economic indicators, GDP for Q2 was revised marginally higher from 6.5% y/y to 6.6%. Inflation remained at a 13-year high of 5.4% for July, unchanged from the previous month and largely due to a low-base effect. Unemployment dropped to 5.2% in August, reflecting a steady recovery in the labour market as more businesses reopened. Factory activity began showing signs of slowing down, with Manufacturing PMI coming in at 61.1 for August from 63.40 in the previous month. Services PMI dropped to 55.1 in August, well below market expectations of 59.5. In more positive news, Non-Manufacturing PMI rose to 64.1 in July from 60.1 in the previous month, well above market expectations of 60.5.
Equities closed the month with the S&P 500 returning 3.0%, the Dow Jones Industrial 30 1.5%, and the technology-heavy Nasdaq Composite delivering 4.1% (all in US$).
In South Africa, President Ramaphosa announced a surprise reshuffle of his cabinet, which included the replacement of finance minister Tito Mboweni with ANC economic head Enoch Godongwana. Investors welcomed Godongwana’s appointment given his history as an advocate of investor-friendly policies, and the likelihood that he will pursue fiscal discipline, which is seen as critical for the country's economic development.
In other news, South African scientists uncovered a new strain of the Coronavirus, C.1.2, which showed mutations similar to those seen in the more-transmissible Delta variant. Eskom announced that it was considering a R106 billion investment in wind and solar projects by 2030. The state-owned power utility managed to cut its debt by 17%, largely due to a cash injection from the government, with further plans to reduce its liabilities. Meanwhile, National Treasury submitted the Second Special Appropriation Bill to Parliament, seeking to unlock R32.9 billion to address the economic impact of the Covid-19 pandemic and the recent civil unrest that broke out across various parts of the country.
On the economic data front, inflation eased for the second straight month to 4.6% y/y in July from 4.9% in June. The South African Reserve Bank voted unanimously to keep its benchmark repo rate unchanged at a record low of 3.5% during its July 2021 meeting. Meanwhile, manufacturing PMI fell sharply to 43.5 in July of 2021 from 57.4 in the previous month, signalling the steepest contraction since the start of the pandemic. In more positive news, retail trade grew 10.4% y/y, beating market expectations of a 9.6% gain.
The FTSE/JSE ALSI returned -1.7% in August. Detracting from performance was the Industrial sector with -4.4%, as shares in e-commerce giant Naspers and subsidiary Prosus were among the worst performers after China formally issued rules to combat gaming addiction among teenagers as part of its crackdown on tech companies. Resources lost 4.8%, while Financials and Listed Property gained 12.3% and 7.1% respectively. The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned 2.0%. SA bonds delivered a positive 1.7% (as measured by the FTSE/JSE All Bond Index), SA inflation-linked bonds returned 1.2% and cash (as measured by the STeFI Composite) delivered 0.3%.
Finally, the rand rebounded against the major currencies following its July weakness amid the social unrest. It appreciated 1.0% against the US dollar, 2.1% against the pound sterling and 1.5% against the euro.
UK AND EUROPE
In the UK, the Bank of England kept its monetary policy unchanged in August, reiterating that it would not tighten its monetary policy until there was clear evidence that significant progress was being made in eliminating spare capacity and achieving the 2% inflation target sustainably. The central bank also revised its inflation forecast to, peak at 4% in late 2021 and early 2022, well above the 2.5% forecasted in May.
In other economic news, the UK economy grew by 4.8% q/q in Q2, recovering from a 1.6% contraction in the previous quarter. Inflation eased to 2.0% y/y in July, below market expectations of 2.3% and well off the 2.5% recorded in June. Meanwhile, unemployment fell to 4.7% in Q2, from 4.9% in the previous quarter, suggesting that the labour market is continuing to show signs of recovery.
Elsewhere in Europe, the European Central Bank's (ECB’s) new guidance on interest rates continued to spark debate among its members, with several revisions to the final proposal having been made to appease the bank’s more hawkish members. Once finalised, the forward guidance will provide greater commitment to bringing inflation to within the ECB’s target, as well as provide safeguards against a premature tightening of monetary policies. Meanwhile, Euro Area inflation grew by 2.2% y/y in July, reflecting an increase in demand and activity following the reopening of the bloc's economy.
For the month, the UK’s FTSE 100 returned 1.0%, the German DAX 1.4% and France’s CAC 40 0.6% (in US$).
CHINA AND JAPAN
In China, negative economic data and concerns of declining liquidity weighed on investor sentiment, prompting the Peoples Bank of China to inject CNY120 billion into the banking system at the end of August, the largest weekly injection in seven months. Sentiment was also dented by persistent worries over the regulatory crackdown in some sectors, particularly in technology, with China’s Ministry of Industry and Information Technology stating that 43 apps, including Tencent Holdings's WeChat, were found to have illegally transferred users' data.
On the economic data front, Manufacturing PMI fell to 49.2 in August from 50.3 in July, below market estimates of 50.2 and marking the first contraction in factory activity since the start of the pandemic. It was a similar story for Non-Manufacturing and Services PMI, falling to 47.5 and 46.7 in August (from 53.3 and 54.9) respectively. China's retail trade increased by 8.5% y/y in July, missing market expectations of an 11.5% rise and below the 12.1% gain posted in June.
Turning to Japan, a surge in Covid-19 infections weighed on investor sentiment, with the government expanding the state of emergency until mid-September and across a greater number of areas. Although the Tokyo Olympics were successful from a sporting perspective, analysts believed their positive growth impact would be lower than expected due to the lack of spectator spending and less advertising activity, among other factors.
Japan’s economy advanced by an 0.3% q/q in Q2, above market expectations of a 0.2% increase and well above the 0.9% contraction posted in Q1. The Bank of Japan signalled that the economic outlook was highly uncertain, with risks skewed to the downside due to supply constraints that could disrupt output. However, the BoJ added that economic activity could strengthen more than expected once pent-up demand materialises.
Looking at other economic indicators, consumer prices declined by 0.3% y/y in July following a 0.5% drop a month earlier, marking the tenth straight month of declines amid weakening consumption. Meanwhile, producer prices rose by 5.6% y/y in July, above market consensus and outpacing June's figure of 5%. This was the highest reading since September 2008 amid a surge in commodity prices.
Japan’s Nikkei 225 delivered 2.9%, the MSCI China was flat at 0%, and Hong Kong’s Hang Seng -0.2% (in US$).