We start the weekly by remembering the atrocities that happened 20 years ago today on US soil, most certainly changing the course of history since then. We will never forget.
Markets lacked conviction for much of the past week as investors seemed ambivalent, and US and European equities – unable to find support – slowly and steadily deteriorated. Investors tried to rediscover their mojo on Friday mid-session as US indices slipped briefly into the green, but it did not last long with equities fading badly into the close. Markets in Asia were an exception last week as the Nikkei 225 and Shanghai Composite both bucked the trend and ended up sharply on the week. The weakness in US equities isn’t surprising because there are more things that can go wrong than there are things that can go right – the Delta variant, a Fed “mis-step”, ongoing supply chain disruptions, slowing economic growth or higher-than-expected inflation, and of course heady valuations. Having said this, I am a realist. US equities have experienced a few mini-corrections since the post-pandemic recovery began, but on each occasion, enough unbridled investor optimism eventually surfaced to save the day, righting the ship before markets could descend into chaos. So why should this round of weakness be any different than prior periods? Even when a period of weakness does occasionally emerge, like this week, each successive one seems to be shorter and shallower than the one before, so much so that it can lead to a feeling of complacency. However, do not get comfortable, because a more severe correction given high valuations and other risks on the horizon is possible, even probable, at these levels. And a “real” correction of some sort might not be a bad thing as long as it is not too sharp or severe and does not last too long. Such a correction might give long-term investors a chance to regroup and invest at more reasonable valuations whilst flushing out many short-term oriented day traders that favour momentum over value.
Below is an interesting graphic from Moody’s Analytics that illustrates growth for this year and next for major countries around the world.
GDP growth will obviously moderate next year everywhere but will be above pre-pandemic growth levels (i.e. 2019) as the stimulus feel-good continues but starts to fade. Perhaps the one exception is China, which is projected to have 5.8% GDP growth in 2022, below its 2019 (pre-pandemic) level of 6.0%, reflecting the continuation of the slowing growth trend in China following a decade of rather amazing growth. Should you be interested, the full report from Moody’s Analytics is here.
The ECB released its policy statement on Thursday (here). The ECB kept short term interest rates on hold but added a twist as far as its ongoing QE programme. Specifically, the press release said that the central bank might embark on a “moderately lower pace of net asset purchases under the PEPP than in the previous two quarters.” At a press conference following the release, ECB President Christine Lagarde went out of her way to say that this was not a decision by the ECB to taper, choosing instead a “different” (and implied more accommodative) path than the Federal Reserve and the Bank of England. I found this awkward, because reduced purchases are clearly tapering, but perhaps it is the baked in optionality that makes it a slightly softer response. It didn’t seem to rattle markets too much one way or the other though. It is very clear though that the Fed, BoE and ECB all live in fear of the day of reckoning when they shift towards a more hawkish approach.
Let’s look at the data now for the week. Equities in the US and Europe were weaker this past week, with the S&P 500 having the dubious distinction of being the worst performer (-1.7% W-o-W) amongst the global indices I track. AAPL was one of the main drivers of US weakness on Friday, falling 3.3% after a judge ruled that developers could bypass the App Store and therefore avoid paying commissions to Apple for purchases of (third-party) apps. China (+3.4% W-o-W) and Japan (+4.3% W-o-W) were exceptions to the weakness in global equities. Japan continued its resurgence as optimism grows over the pending change in political leadership. The Nikkei 225 has notched a nearly 10% increase since August 27th. China has also bounced back from its self-inflicted wounds, with the Shanghai Comp increasing around 8% from its lows three weeks ago.
US equities were weaker across the board this week, with the NASDAQ Composite being the relative outperformer (-1.6%).
Yields on US Treasuries were only modestly higher W-o-W, as events in the US government bond market were muted. 10-year government yields in the UK, Eurozone and Japan were also higher for the week.
In the corporate bond market (credit), yields and spreads were virtually unchanged on the week. This is encouraging for issuers, as USD-denominated supply continues to arrive in droves across the credit spectrum, especially in high yield, as issuers remain keen to take advantage of a backdrop that is very unlikely to continue, especially once the Fed moves to address its pandemic-driven policies as far as short-terms rates and bond purchases. As you can see in the graphic below, USD primary issuance (meaning new issues) remain well above pre-pandemic years albeit below 2020, which was a year driven first by fear as the pandemic set in, and then by greed (as issuers sought to take advantage of favourable new issue conditions). 2021YtD has been much more about the latter. Euro-denominated new issues remain at similar levels to prior years, reflecting the rate structure that has been in effect in the Eurozone since before the pandemic.
As far as safe haven assets, gold was down 2.3% W-o-W, whilst the Yen was also modestly weaker. The USD was slightly stronger, perhaps reflecting some flight into the world’s reserve currency as risk sentiment worsened slightly.
WTI crude managed to eke out a small gain for the week, closing at $69.71/bbl (+0.9% W-o-W). Following the much-covered difficulties of El Salvador starting to accept BTC as legal tender, the benchmark cryptocurrency lost its support mid-week and fell over 10% W-o-W, slipping well below recent highs to end the week at $44,884.
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