The majority of financial assets have performed well during the latest reporting period with credit, equities and alternatives all continuing to rise, benefitting from the global reopening as a number of developed markets continue to lift restrictions.
With inflation surprising on the upside recently, the prospect of tighter monetary policy resulted in a late selloff across conventional credit markets. The iBoxx Corporates Index was down -1.0% marginally outperforming the FTSE All Gilts Index which was off -1.8%. The Index Linked gilts performed particularly well on the back of renewed worries about rising inflation, gaining +2.3%, despite many investors believing that the rise is only transitory.
Elsewhere, equity markets were positive. The US was the best performer with the S&P500 Index adding +3.1%, although other developed markets also made progress with the FTSE Eurofirst adding +1.0%. In the UK, the FTSE All Share Index gained +2.2%, within which the FTSE 250 Index (+3.5%) outperformed the FTSE 100 Index (+2.0%). The FTSE World Index added +2.0%. Equity markets in both the Emerging Markets and Asia Pacific sold off late in the period as China quietly stepped up its intervention in markets and the future of Evergrande, one of China’s largest property developers, continues to be questioned. The MSCI Asia Pacific Index and the MSCI EM Index were off -5.0% and -5.7% respectively. Within currency markets, GBP was weaker against USD, falling -2.4%, whilst it was flat (-0.1%) against EUR (all figures total return, in GBP).
On the virus front, the Delta variant continued to spread and daily cases have picked up across the globe. In Europe and the UK, the vaccination programmes have meant that hospitalisations have not risen anywhere near as fast as during the last wave. In the US, hospitalisations have increased more sharply which can likely be attributed to lower vaccination take-up. Furthermore, data from Israel and the UK also suggests that antibody protection from the vaccine wanes after six months and therefore booster jabs are likely to be needed. This all creates further uncertainty about the projected course of the pandemic, however the base case remains that the global reopening will continue and we can hopefully avoid any further economic shutdowns in the developed world.
As mentioned previously, the US was the best performing market driven higher by solid economic data and a generally positive earnings reporting season. Inflation also increased to +5.4% year-on-year, however, certain inputs would appear to be softening. The labour market continues to go from strength to strength with a number of new jobs added and marginal wage inflation. The Federal Reserve appears content with the progress made on inflation, which it still believes will be transitory, and the market expects some sort of tapering to occur later this year. Elsewhere, within the political arena, the Senate passed a bipartisan infrastructure bill that contains USD500 billion of additional spending. The bill has now moved to the House of Representatives where it also needs to get approval, which one should expect to be a much tougher battle. It is anticipated though that some sort of final package will be agreed later in the autumn.
In the UK, domestic Covid-19 restrictions were finally lifted in August. Evidently this is good news for the economy, however, daily coronavirus cases began to rise in the latter half of August although the number of new cases seems to have stabilised recently. The economy in the UK continues to perform well although it may well be past the peak rate of growth. That said the strength of the domestic reopening is certainly a positive for companies. Unemployment data also remains strong with a number of new jobs added. However, the furlough scheme has now ended and the effects of its withdrawal are yet unknown, although it will hopefully help alleviate some of the labour constraints the economy is currently facing.
It was a slightly quieter period for economic news in Europe. Continental Europe remains slightly behind the US and the UK on the road to normalisation. Economic data, like other developed regions, was strong though and inflation continues to tick higher.
As mentioned earlier, the emerging markets and Asia Pacific had a relatively quiet period, although events in China continue to cause some concern. The Chinese regulatory changes continued throughout the period with a widening number of sectors and companies affected. China has also had to grapple with the arrival of the Delta variant but it has responded with its proven strategy of mass testing and mobility controls.
All in all this was a positive period for investors with the majority of asset classes rising or making progress, continuing the economic recovery out of the pandemic as economies continue to reopen.)
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