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WeekWatch -‘A strong early August helped push the S&P 500 index on Monday’ August 2021

WeekWatch -‘A strong early August helped push the S&P 500 index on Monday’ August 2021

A strong early August helped push the S&P 500 index on Monday to double the figure it recorded at its lowest during the crash in March 2020. However, it fell gradually over the next few days, to finish the week down. The Nasdaq – which had already doubled its COVID-19 lows some time ago – and the Dow both also fell this week.

There were a number of reasons for this fall. Despite the vaccination programme continuing, the threat of COVID-19 persists, and the number of daily confirmed cases has been rising in several US states. Although the number of deaths remain well below levels of early 2021, these figures have also been increasing over recent weeks.

Markets were also rattled by minutes from the July Federal Open Market Committee (FOMC) meeting that were released this week, showing growing approval to begin tapering federal asset purchases earlier than expected. This COVID-19 relief measure has been an important part of the rapid recovery in US asset prices since March 2020. The reason the Fed’s policies matter for investors is because central bank actions have been a key driver of the market recovery that began last year. With these bond purchases, or QE, and also with other forms of support such as keeping interest rates low, central banks around the world have helped to support asset prices through the pandemic. However, with economies now recovering, many are preparing to taper down their levels of support. Although this will help to keep inflation in check, it is likely to have a negative effect on some asset prices.

Noting the chaotic scenes in Afghanistan that accompanied the US withdrawal from the country, Mark Dowding, chief investment officer at BlueBay, suggested policymakers may be able to learn lessons when it comes to their own upcoming policy exits in order to minimise disruption: “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 disappointed by falling sales data reported on Tuesday. Figures from the United States Department of Commerce revealed retail sales fell from July 2020 to July 2021 by 1.1%.

Also affecting the US, as well as all other markets, were the ongoing jitters caused by Beijing’s regulatory clampdown in China. This included a new set of draft regulation on Tuesday restricting the use of user data and preventing “unfair competition” . A number of Asian markets continued to fall over the week, with the Hang Sang Index now more than 20% below its February peak.

Many of these issues affected European markets, with the FTSE 100 falling notably on Thursday morning – the day after the FOMC minutes were released. Although it was able to claw back some of the fall by the end of Friday, it still finished the week down.

The week saw July’s CPI inflation rate revealed as 2.0%. After months worrying about increasing inflation, this was actually down from the 2.5% inflation rate recorded in June. A big part of the reason for this fall is that July’s data was compared to July 2020 data, when prices increased as the country left the first lockdown.

Looking ahead, Samuel Tombs, chief UK economist at Pantheon Macroeconomics noted: “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.”

The STOXX Europe 600 followed a similar pattern to the FTSE, with a sharp fall on Thursday morning being followed by a gradual, partial recovery on the back of the FOMC minutes. Overall, the week was one of the worst the index had experienced since February and marked the first week it had finished down since mid-July.

BlueBay is a fund manager for St. James’s Place.

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