Market Analysis July 2021

Despite intermittent volatility stemming from rising Covid-19 cases and China's regulatory actions impacting tech and private education sectors, US equities concluded July on a higher note. An upbeat earnings season overshadowed these concerns, driving the upward momentum.

China's ongoing efforts to regulate influential companies, notably Didi's New York-listed shares, reverberated through US equity markets. The spread of the Delta variant further contributed to the unease.

However, data indicated the US economy's resilience. In the Federal Reserve's July meeting, progress aligned with its mandate was acknowledged, with emphasis on labor market improvements before tapering asset purchases. While inflation risk was recognized, it was deemed transitory. Consumer confidence remained high, though the University of Michigan's figure saw a five-month low due to inflation worries.

The pivotal factor was the Q2 earnings season, witnessing more companies exceeding earnings estimates than the five-year average. The energy sector faced weakness due to capacity concerns, while healthcare, real estate, and utilities thrived.

Eurozone equities recorded gains in July, propelled by robust Q2 earnings from strong sectors like information technology, real estate, and materials. Energy lagged behind. About half of the companies had reported their Q2 earnings by month's end, generally positive despite soft comparisons with Q2 2020.

Vaccine distribution in Eurozone nations gained momentum, with Spain, Italy, and Germany surpassing the US in fully vaccinated shares against Covid-19. This boost instilled hope that the Delta variant's rising cases wouldn't lead to further economic restrictions.

Eurozone business activity experienced its fastest growth in 21 years in July, as the flash composite purchasing managers' index rose from 59.5 in June to 60.6. Q2 GDP exhibited a 2.2% growth after a Q1 decline, and July's annual inflation escalated to 2.2% from June's 1.9%.

The European Central Bank concluded its strategic review, revising the inflation target to 2% from "below but close to 2%." The "Fit for 55%" package was proposed by the European Commission, aiming to cut harmful emissions by 55% by 2030 through various measures.

UK equities experienced gains in July, though defensive large-cap overseas earners were adversely affected by sterling strength against the US dollar and the euro. The month began with market sell-offs due to global growth and Delta Covid-19 variant fears. Risk appetite rebounded in the latter half, driving recovery in economically sensitive market segments.

Strong Q2 results characterized the latter part of July, particularly in basic materials, financials, and energy sectors. Mid-cap equities performed well, partially due to ongoing merger and acquisition activity.

UK's economic growth was modest at 0.8% in May, below consensus and slower than April's 2%, attributed to supply shortages and bottlenecks. Most social contact restrictions were lifted on July 19, and despite increased Covid-19 infections, rates unexpectedly decreased.

The government's Covid-19 app-induced "pingdemic," advising self-isolation for workers, weighed on the economy.

July concluded with Japan's stock market experiencing a 2.2% loss, remaining at the lower end of its recent range. The yen strengthened against the US dollar after months of weakening. Market sentiment was impacted by global Covid-19 infection increases and domestic anxiety as daily infections neared 10,000. Public unease and opposition towards the government's pandemic approach during the Olympic Games contributed to the sentiment. Near-term recovery of the domestic economy hinges on successful vaccine roll-out.

Asia ex Japan equities recorded a negative return, predominantly led by China's crackdown on tech and education firms. Political tensions with China and yuan volatility also affected Hong Kong. The Philippines faced an 11.7% decline due to Delta variant cases, and South Korea's stocks declined as Covid-19 spread prompted stricter distancing rules. Thailand, Malaysia, Taiwan, and India experienced varied declines and gains.

July witnessed an investor shift towards safer assets due to Covid-19 Delta variant concerns and indications of global growth moderation, leading to government bond yield declines and price surges. Despite ongoing recovery and lifted lockdowns, global growth showed signs of slowing, especially in China.

US 10-year yield retreated from 1.47% to 1.23%, reversing Q1's significant uptick. The Federal Reserve confirmed economic progress and reiterated transitory inflation expectations.

UK 10-year yield fell from 0.72% to 0.57%, despite eased restrictions leading to renewed Covid-19 cases.

In Europe, a rise in Covid-19 cases was offset by easing lockdown measures, sustaining economic improvement. German inflation hit 3.8%, its highest since August 2008. German and Italian 10-year yields declined, while corporate bonds yielded positive returns but underperformed government bonds.

Emerging market government bonds saw marginal increases, EM corporate bonds followed suit, and high yield credit slightly decreased. EM currencies exhibited mixed performance against the US dollar.