24 August 2021
A tenacious early August helped drive the S&P 500 index on Monday in the right direction – essentially doubling the figure it recorded at its lowest during the crash in March 2020. It then fell progressively over the next few days, however, closing the week down. Likewise, the Nasdaq – which had already managed to increase its COVID-19 lows twofold a long time ago – and the Dow both fell this week.
There were many contributing factors to this fall – in spite of the continued vaccination programme, the perils of COVID-19 persist, and the number of daily confirmed cases has been soaring in several US states. While the number of deaths continues to be well below the levels seen in early 2021, these figures have also been rising over recent weeks.
Markets were also unsettled by minutes from the July Federal Open Market Committee (FOMC) meeting that were revealed this week, showing a growing agreement to start cutting back federal asset purchases earlier than anticipated. This pandemic relief measure has been a key factor in the rapid recovery in US asset prices since March 2020. Why, indeed, are the Fed’s policies meaningful for investors? Central bank actions have been a driving force behind the market recovery that began last year. With these bond purchases, or QE, and with other forms of support too – such as keeping interest rates low – central banks across the globe have supported asset prices during the COVID-19 outbreak. Nevertheless, now that economies are recovering, many are preparing to wind down their levels of support. This will go some way to keep inflation in check, yet it is likely to have a detrimental impact on some asset prices.
In light of the scenes of unrest in Afghanistan alongside the US withdrawal from the country, Mark Dowding, Chief Investment Officer at BlueBay, proposed that there may be lessons for policymakers as regards their own imminent policy exits, in order to keep disruption to a minimum:
“Clear communication and an orderly timetable would appear central to this. From this standpoint, it has been interesting to observe Fed speakers coalescing on the idea of announcing a taper in the next couple of months and starting to reduce bond purchases later this year.
“An insightful article in the Wall Street Journal appeared to suggest that many in the Fed may then look to complete the taper by the middle of 2022. This is consistent with our own thoughts that a first move up in interest rates is likely by the end of next year.”
US markets were also disheartened by falling sales data revealed on Tuesday. Figures from the United States Department of Commerce reported that retail sales dropped from July 2020 to July 2021 by 1.1%.
The ongoing nerves brought about by Beijing’s regulatory clampdown in China continued to impact the US, as well as other markets. This comprised a new set of draft regulations on Tuesday, limiting the use of user data and thwarting “unfair competition”. Many Asian markets continued to take a downward turn during the week, with the Hang Sang Index now more than 20% below its February high.
European markets were affected by many of these issues, with the FTSE 100 falling significantly on Thursday morning – the day following the release of the FOMC minutes. Despite the fact that it was able to recover some of the fall by the end of Friday, it nevertheless closed the week down.
The week saw July’s CPI inflation rate shared as being 2.0%. Following months of concern about increasing inflation, this was, in fact, down from the 2.5% inflation rate recorded in June. A big contributing factor for this fall is that July’s data was compared to July 2020 data, when prices rose as the country left the initial lockdown.
Looking ahead, Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, remarked:
“The headline rate remains on course to rise sharply, though we think the BoE’s forecast for a 4.0% average rate in Q4 and Q1 is a bit too high.”
It was a similar story for the STOXX Europe 600 compared to the FTSE, in that it experienced a sharp drop on Thursday morning followed by a progressive, partial recovery on the strength of the FOMC minutes. On the whole, the week was one of the worst the index had witnessed since February, and it marked the first week it had finished down since mid-July.