Market Review - August 2021

By Jan Faure

Markets extend gains but risks remain.

US and European equity markets closed out August with a seventh consecutive monthly advance led by strong company profits and supportive central bank policies. The S&P 500 index gained 2.9%for the month, while the Euro Stoxx 50 added 2.6%. Asian markets fared better than the previous month with Japan’s Nikkei 225 index gaining 2.9%, while the Hang Seng index and China’s CSI 300 index declined 0.3% and 0.1% respectively.

The regulatory environment continued to dampen sentiment and appetite for Chinese tech stocks. Beijing issued additional regulations for private companies in support of its "common prosperity" agenda. The campaign, launched last month, is intended to rein in China’s internet companies in areas such as competition, data security, online lending and gaming addiction.

In a much-anticipated speech to the Jackson Hole Economic Symposium of central bankers, US Federal Reserve Chairman Jerome Powell stated that "it could be appropriate to start reducing the pace of asset purchases this year". Despite the Fed indicating that it will start easing one of its major support mechanisms, it indicated that it is in no hurry to raise interest rates. That was good news for markets, which were expecting the Fed to begin winding down its massive bond-buying programme this year.

Significantly, Powel separated the bond tapering decision from the interest rate decision, a move positively received by markets. The bond-buying program and record-low interest rates have been key pillars of the global recovery from the Covid-19 pandemic. Markets cheered the prospect of interest rates being kept at current lows until the economic recovery is more entrenched.

Despite the mostly positive momentum in markets, there remain a number of concerns that will keep market participants on their toes. These include:

• The fast-spreading Delta Covid variant has raised concerns around vaccine efficacy and what other variants may follow. The Delta mutation has forced some governments to reimpose containment measures.
• Recent developments in Afghanistan may destabilise the region and unnerve investors.
• We’re seeing a shift in Chinese regulation away from market friendly policies.
• The market seems to have bought into the lower-for-longer interest rate narrative.

On the last point, the idea that interest rates will stay at record low levels for a prolonged period has been a major contributor to the rally in global equities and bonds. There is a concern that current equity valuations are unsustainable and will have to be backed up strong earnings growth. Low interest rates have done much of the heavy lifting, raising the risk of a market correction if monetary policy is tightened at the wrong time. Yet there never seems to be a good time for markets to accept tighter monetary policy.

GLOBALINDICATORS: Local reporting currencies