Market Watch: July 2021

Global financial markets hit all-time highs once more in July, marking the sixth monthly consecutive gain. However, the stock rally slowed last week on fears that the rising Delta variant of COVID-19 could become a potential headwind for global economic growth. In addition, many companies coming into Q3 2021 earnings seasons with lofty valuation levels and China’s crackdown on internet and technology businesses are making investors nervous.

The S&P/TSX Total Return Index was up 0.61% in July as Canada announced it would open its doors to vaccinated Americans in mid-August, followed by all vaccinated tourists shortly after.

Crude oil prices rose 0.65% last month while the Canadian loonie rose 0.61% against the US greenback as the Federal Reserve delayed its tapering decision. The dollar fell to a one-month low versus a basket of major currencies following the Federal Reserve’s promise that rate rises are still a long way off.

Early data shows the Canadian economy grew by 0.7 percent in June, as companies reopened following closures put in place to combat the coronavirus pandemic. According to credit and debit card statistics, July is expected to be even better as customers resumed spending on high-contact services such as in-person eating, leisure activities, and travel that had previously been limited to them.

According to the Bank of Canada, the COVID-19 pandemic risk has mostly faded, but inflation is expected to stay high in the foreseeable future. However, Governor Tiff Macklem expressed cautious optimism about the economy, saying, “The reopening of the economy and the strong progress on vaccinations have given us reason to be more optimistic about the economy’s direction.”

Furthermore, the Bank of Canada held its key policy rate at 0.25 percent, the same level since the COVID-19 outbreak began. The central bank stated that it would keep rates unchanged until the economy is ready for a rate hike, which it does not expect to happen until H2 2022.

The S&P 500 Total Return Index was up 2.27% in July, as the US economy returned to its pre-pandemic level despite growing at a weaker rate than expected in the second quarter.

The US economy rose out of its pandemic-induced slump as vaccines and federal funding spurred a boom in consumer spending at restaurants, resorts, and retailers. However, a surge of COVID-19 infections caused by the Delta variant of the coronavirus is threatening the recovery. In addition, higher inflation and persistent supply chain problems might weaken the economy if they persist.  

In Q2 2021, GDP growth was 6.5 percent on an annualized basis, much below Wall Street’s forecast of 8.5 percent but slightly higher than the first quarter. In addition, the International Monetary Fund raised its growth projections for the US to 7.0 percent in 2021 and 4.9 percent in 2022, respectively.

FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google) have released their quarterly earnings. Their performance as a group was spectacular. Their sales grew by 36% to $332 billion. Investors, on the other hand, were less than enthusiastic. Alphabet’s stock rose 1.3 percent this week, but the others all fell. The worst reaction came from Amazon, whose shares dropped 7.6%. Investors are concerned that growth rates may decrease since all five stocks are hovering at all-time highs.

On the monetary policy front, the Fed kept its benchmark lending rate unchanged at near zero, claiming that the US economy is on track to recover from the impacts of the COVID-19 pandemic. However, Fed Chairman Jerome Powell said the economy is far from considering a rate hike. The economy has a long way to go before reaching price stability and full employment.

The MSCI ACWI Ex-US Total Return Index was down -1.65% in July after China has launched a regulatory crackdown on big tech and education companies for ideological reasons.

A massive equity selloff ensued in the China and Hong Kong markets due to these new stringent regulations. China placed an effective ban on the country’s $100 billion private tutoring sector, raising fears of a larger crackdown on foreign-listed companies.  However, China told executives of major investment banks that the measures were targeted and not intended to harm other sectors.

In Europe, the eurozone economy recovered from its recession in Q2 2021, expanding by a faster-than-expected 2% compared to the first three months of the year. The 13.7 percent year-over-year growth rate also exceeded expectations. In Germany, France, Italy, and Spain, output increased, albeit the increase in Germany was lower than expected due to supply constraints in the industrial sector.

Inflation in the Eurozone increased to 2.2 percent in July, up from 1.9 percent in June, due to rising energy prices. However, the inflation rate remained unchanged at 0.9 percent when food and gasoline costs were excluded. Policymakers at the Bank of England voted unanimously to retain the key rate at 0.1 percent and by a majority to extend the asset purchase program until the end of the year.

The Portfolio Management Team