Global equities had a poor week across the board, one of the few this year, with nearly all of the major bourses I track losing ground. Perhaps not surprisingly, the most severely affected equity markets were those in China, which suffered from the regulatory authorities cracking down on educational companies last weekend, yet another step in the government’s desire to reign in the fastest growing and most powerful Chinese tech companies. At its low for the week on Wednesday, the Shanghai Composite Index was down nearly 6.5% for the week, before clawing back some of its losses to end up down 4.3% W-o-W. Given China’s weighting in EM indices, this performance also dragged down the MSCI EM index. Japanese equities are continuing to suffer from growing cases of COVID-19 caused by the Delta variant, which has now led to around one-half of the country operating under a state of emergency until at least August 31st. The most difficult problems are in Olympic-host Tokyo and Osaka (source: Reuters). US markets suffered from mixed economic data and a few weaker-then-expected earnings reports (and outlooks) which, in some cases, simply didn’t live up to the ultra-high expectations needed to justify valuations. Mixed economic data is a reminder that the torrid post-pandemic growth will not go on forever. Overlaying this list of issues are concerns about alternative strains of the COVID various like the Beta and Delta strains. In light of this confluence of news, the European indices – which were more or less flat on the week – showed the most resiliency in a week with a lot of negative market-moving news.
As mentioned already, US equities suffered from a combination of earnings disappointments alongside collateral effects from China, since many of the Chinese stocks that were punished the worst are listed in the US. To be more precise, aside from a few top- or bottom-line misses, most S&P 500 companies continue to serve up better-than-expected 2Q results. However, a “miss” on either sales or earnings causes concern, and when companies throw in a dose of reality as far as the outlook (i.e. earnings and sales growth moderating), this seems to really set investors off. At the end of the day, it boils down to unrealistic and unsupportable valuations. I suspect that stock prices will continue to flat line (best case) or even fall as sales and earnings growth moderates, a healthy process which should allow multiples to trend slowly towards longer-term historical averages. The exception this week was the smaller cap Russell 2000, perhaps a sign that value is coming back to the forefront as investors become more bearish on the outlook for technology and other momentum stocks which continue to trade at historically rich valuations. If you want to learn more about why I think that valuations are so rich, you can read my article from earlier this week: “How did we get here: US equities are expensive”.
US Treasury yields drifted lower across the curve on the week. The 30-year UST yield – which fell below 2.00% in early July – ended the week 3bps lower, taking it to an amazingly low yield of 1.89% to end the month. The yield curve has also continued to flatten, signalling investors believe that economic growth in the US will moderate more (and perhaps sooner) than originally expected. The 2–10 year yield curve difference has come off its highs in the second half of March (145bps on March 19th), ending July at 105bps, its lowest in six months.
Other developed markets bond yields also continue to trend down, reflecting moderating global economic growth outlook. The US is hardly alone in the direction of government bond yields, as you can clearly see in the table below.
As far as safe haven and other assets, the biggest news this past week was the recovery of Bitcoin and its brethren, which benefited from a good talking up from the dynamic trio of Elon Musk, Cathie Wood and Jack Dorsey at a virtual conference sponsored by the Crypto Council for Innovation (CCI). The interview is here: “The B Word”. This was followed by rumours early last week – quickly denied by the company – that Amazon was posting a job opening for a specialist to help the on-line e-commerce company to begin accepting cryptocurrencies as payments. Even though Amazon denied this was the case, Bitcoin found a new floor and managed to finally break out of the low $30,000 area where it has been anchored, delivering a solid 19.7% gain W-o-W at the same time that equities were floundering.
The Week Ahead
We have more earnings this week and the beginning of the release of July economic data in many countries. Concurrently, we are starting August, a traditionally sleepy month as far as volumes, meaning that we are likely to see more day-to-day volatility in equities in the coming weeks. Globally, there is continued focus on the renewed spread of COVID-19 and the variants, which show an obvious correlation with vaccination rates that seem to be “maxed out” in the US and most of Europe. This overlay cannot be ignored, as much as we would like. This is another big week for earnings for S&P 500 companies, with 151 reporting. There is a shift in focus away from technology companies this coming week, as you can see in the list below containing some of the better-known companies that will be reporting their results.
Tues: BABA, BP, CLX, LLY, KKR, MAR, PEG
Weds: CVS, GM, KHC
Thurs: AEX, K, NRG, STWD, TEN, VIAC, W
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