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WeekWatch -‘Markets generally ended the week up, despite recording drops earlier in the week’ July 2021

WeekWatch -‘Markets generally ended the week up, despite recording drops earlier in the week’ July 2021

Markets generally ended the week up, despite recording drops earlier in the week.

Rising numbers of the Delta variant of COVID-19, and a fear that this could have a dramatic effect on the global recovery had been weighing on markets for a few weeks now. On Monday, these fears helped push markets to some of their worst days of the year. The STOXX Europe 600 Index fell 2.3% on the day, its worst daily performance so far this year. The FTSE 100 fell by a similar amount, while American stocks in the S&P 500 Index dropped 1.6%.

The weak market performance was largely mirrored in Asia the following morning, with the Nikkei 225, Shanghai composite and Hong Kong’s Hang Seng index all closing down.

Despite these falls, a number of commentators said they were not expecting this to signal the start of a wider market rout, such as the one seen in March last year. Bethany Bekkett, assistant economist at Capital Economics, for example, noted: “ The big picture is that we still expect US growth to be strong in absolute terms, and we forecast that global growth will remain above trend until end-2022. This underpins our view that, while we don’t expect big gains in risky assets from here, a major setback is unlikely.”

Western markets began to recover from Tuesday and spent much of the rest of the week going from strength to strength, and generally finished the week up. The S&P 500 Index, for example, posted its biggest one day drop since May on Monday, but this was followed by its biggest one-day gain since March the following day. By Friday, it was back to trading at record highs.

Markets were helped by reports on Thursday that Federal Reserve Chair Jerome Powell has broad support for another term in the role. Such a move would signify a continuation of Powell’s relatively calm approach to increasing rates and tapering economic support measures put in place during COVID-19, and therefore acted to reassure markets.

Also reassuring markets was the European Central Bank’s decision to become more tolerant of inflation before raising interest rates, and to keep buying bonds. According to press reports, the decision was not unanimous, with German and Belgium bank heads objecting to some of the wording the ECB used. Nevertheless, the decision helped reassure markets, and helped European investors end the week on a strong note.

In the UK, the so-called ‘Pingdemic’ has continued unabated, with 600,000 people told to self-isolate during the week. This has led to fears that the high number of isolating workers could begin to have a negative effect on the UK economy.

The UK monthly Purchasing Managers’ Index, run by IHS Markit and The Chartered Institute of Procurement & Supply, for example, found private sector growth hit a four-month low earlier in July, largely due to staff and material shortages.

Chris Williamson, Chief Business Economist at IHS Markit, said: “July saw the UK economy’s recent growth spurt stifled by the rising wave of virus infections, which subdued customer demand, disrupted supply chains and caused widespread staff shortages, and also cast a darkening shadow over the outlook.”

Despite these concerns, the FTSE 100 ended the week broadly flat, having also recovered from its Monday falls.

All this has left analysts with questions about the future. Mark Holman, CEO, Portfolio Management, at Twenty Four Asset Management, for example, asked whether Monday’s experience suggests that markets will experience more market volatility in the near future, or if the recovery later in the week showed the level of investor willingness to deploy cash in every dip.

“We think both forces will have a major part to play, but overall we will likely face at least a kink in the road on our journey to full economic recovery, and, in our opinion, that kink is now upon us,” he added.

Of course, the best way to deal with uncertainty is to invest for the long-term with a well-diversified set of investments.

TwentyFour Asset Management is a fund manager for St. James’s Place.

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