Blair Campbell, MitonOptimal International (Guernsey)Idiosyncratic factors were a feature of global markets in July as investors reacted to the anticipated time frame of tapering of asset purchases by the Federal Reserve (‘Fed’), regulatory restrictions being  imposed by the Chinese authorities on their property, internet and education sectors, and concerns surrounding the spread of the Covid-19 delta variant, most notably in the emerging world.  More constructive, meanwhile, was the continued easing of societal constraints in Europe, with all eyes on the ramifications of effectively all restrictions being lifted in the UK.  Against this backdrop developed markets outperformed meaningfully, returning 1.8% in USD terms over the month as measured by the MSCI World Index, whereas the rapid sell-off in China exposed securities dragged down the MSCI’s Emerging Market gauge -6.7%, again in USD terms.

Minutes from the Federal Open Market Committee’s June meeting indicated the tapering of asset purchases is being discussed, prompting investors to bring forward their expectations of the timing.  The US economy expanded 6.5% over the second quarter, missing forecast expectations of a 8.5% expansion; however individual companies have fared exceedingly well, with 87% of the 445 S&P 500’s components to have reported so far having beaten analysts’ estimates. This quarter’s growth in year-over-year earnings is the highest since Q4 2009, propelling the index to the best performing major benchmark over the month with a return of 2.4% in local currency terms.

In Europe the continued lifting of lockdowns and the pace of the vaccination programme was illustrated in the Purchasing Managers Index (PMI) prints for July. The Composite PMI reading of 60.2 topped June’s 59.5, the highest reading since 2006, as the service sector (59.8) benefitted from a return to more normal economic activity. The Manufacturing component’s reading was 62.8. This robust PMI data was reflected in the forecast-beating second quarter GDP increase of 2.0%, which more than offset the region’s small contraction in the first three months of 2021. The MSCI Europe ex UK index increased 2.1% in Euro terms in July.

The 19th of July was dubbed ‘freedom day’ in the UK as virtually all remaining restrictions relating to the Coronavirus pandemic were lifted, making the UK somewhat of a test case in to whether a highly populated country with high case numbers can cope without restrictions. At this stage there doesn’t seem to be any obvious consequences, as case numbers by the end of the July remained stable, though case numbers will likely filter through in to the August data. The FTSE All Share, a proxy for the UK market, returned 0.5% in Sterling terms over the month.

Investors’ concerns over the spread of the Covid -19 Delta variant caused Sovereign bond yields to rally over the month, with the UK being one of the top performers as the UK Gilt market returned 2.9% in July. The US Treasury market was also in focus as investors digested latest inflation data (+5.4% annualised) along with minutes from the Fed’s FOMC meeting.  This made for increased volatility,: the yield on the benchmark 10-year fell from 1.47% at the end of June to a 1.13% intra-month low before settling at 1.22% at the month-end.

Source of all data: Bloomberg. The content of this article is for information purposes only and does not constitute an offer or invitation to any person. The opinions expressed are subject to change and are not to be interpreted as investment advice. You should consult an adviser who will be able to provide appropriate advice that is based on your specific needs and circumstances. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable and given in good faith, but no representation is made as to their accuracy, completeness or correctness.


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