Global financial markets increased to new all-time highs in August, posting their seventh consecutive monthly gains. Second-quarter earnings came out stronger than expected, which boosted investor’s confidence despite concerns about the global pandemic. The Delta variant continued to spread, with new cases being reported daily all across the world. Vaccination programs in Europe have resulted in hospitalizations not rising as quickly as during the last wave. However, hospitalizations have increased dramatically in the US, particularly in the southern states, due to lower vaccination rates.
Canada
The S&P/TSX Total Return Index was up 1.63% in August despite the Canadian GDP shrinking by 1.1 percent in the second quarter of 2021.
The Canadian loonie fell 1.15% against the US dollar after a 7.37% decrease in crude oil prices. Worries that the Delta coronavirus variant might slow the global economic recovery propelled the safe-haven US dollar to a nine-month high versus other key currencies.
Canada’s economic recovery unexpectedly slowed in the spring and early summer, increasing concerns about the country’s long-term growth. Statistics Canada announced that GDP decreased by 1.1 percent on an annualized basis from April to June, down from a revised 5.5 percent rise in the first three months of the year. Economists predicted the economy to grow by 2.5 percent this year. As a result of various industries shortages and other worldwide supply chain bottlenecks, exports fell sharply during Q2.
In addition, early estimates show that GDP growth dropped again by 0.4 percent in July. Supply chain issues may have also been a factor in this unexpected downturn. Manufacturers and construction and retail trade contributed to the decrease during the month, according to Statistics Canada.
Canada is the only country part of the G7 that experienced a record deceleration in the second quarter. Canada’s Conservatives pounced on Liberal Prime Minister Justin Trudeau for mismanaging the economy, placing the economy at the focus of debate three weeks before the national election.
US
The S&P 500 Total Return Index was up 3.04% in August, as economic figures revealed a strong economy. However, fears of rising inflation continued.
The manufacturing PMIs for August came in at 59.9, an increase of 0.4 percentage points from the July reading of 59.5 percent. The US headline consumer price index (CPI) increased by 5.4 percent year over year to continue the near-decade highs. However, core CPI decreased modestly, and pressure from several categories, such as used automobiles, driving inflation in recent months seems to be easing.
On the other hand, the job market has been steadily improving. For example, the economy added 943,000 jobs in July, a 0.4 percent increase in earnings month over month, bringing the unemployment rate to 5.4 percent from 5.9 percent. Also, while headline inflation may start to moderate, underlying longer-term wage pressures continue to rise.
The Fed’s preferred inflation gauge, the PCE Deflator, rose 0.3 percent in July, somewhat less than the 0.5 percent increase seen in June. Although supply chain difficulties continue to hamper production and pricing, the Fed’s thesis for transitory inflation is supported by the slowing pace of increases. For the time being, markets seem generally aligned with the Fed’s assessment, with medium-term inflation pricing somewhat higher than current average levels but still well below historical highs.
On the fiscal front, the Senate enacted a bipartisan infrastructure plan that includes $550 billion in additional funding. The bill has now been forwarded to the House of Representatives, facing a far more difficult fight. Progressive House Democrats are hesitant to accept the agreement unless it is accompanied by a $3.5 trillion spending plan that the Democrats want to pass through the budget reconciliation process.
International
The MSCI ACWI Ex-US Total Return Index increased 1.92% in August as China’s regulatory reforms persisted, affecting an increasing range of businesses and sectors.
While more Chinese regulatory measures may cause continuing volatility, the investment consequences of recent Chinese policy actions may not discourage long-term investors. China has also had to deal with the Delta variant’s arrival. It has reacted with mass testing and mobility restrictions, which appear to have controlled the spread so far at the expense of mobility and some economic activity.
In Q2 2021, the UK’s GDP increased by 4.8 percent, which was in line with predictions. However, the August PMIs indicated that the UK may have passed its peak pace of expansion, with manufacturing holding stable at 60.1 and services softening slightly to 55.5, indicating that supply chain and labor limitations are still limiting economic activity. Nevertheless, the current European rebound appears to be more robust than past ones. The euro area economy increased by 2% quarter-on-quarter in Q2, well above the 1.5 percent consensus forecast, bringing GDP to only 3% below pre-pandemic levels.
Europe is slightly behind the United States and the United Kingdom on the road to normalization, as it reopened later. Economic data was solid in August, with flash PMIs of 61.5 for manufacturing and a 2.7 percent year-on-year CPI estimate. However, the pace of development has slowed significantly. As a result, Europe is likely to be nearing its peak for this business cycle.
The Portfolio Management Team