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Global markets to 13 August 2021

Mixed economic data but Wall Street powers on

Global stock markets are still reacting sensitively to the publication of mixed economic data; and the backdrop to this is concerns about the reintroduction of restrictions in some of the world’s regions in response to the spread of the Delta variant.

Nevertheless, Wall Street stocks continue to rise, with many rallying to all-time highs. European bourses have also been steadily gaining momentum, on track for their fourth consecutive week of gains. European markets have been buoyed by optimism in relation to a strong earnings session and a steady post-pandemic recovery.

Meanwhile in Europe, the pan-European STOXX 600 index has hit a record high for the tenth consecutive trading session. Asian stock markets unfortunately have been relatively hard-hit by both the spread of the Covid-19 Delta variant, and Beijing’s announcement that it will strengthen its control over sectors such as technology and healthcare within the framework of its five-year plan.

China signals crackdown on privacy, data, monopolies to continue

Once seen as a reformer, President Xi Jinping is leading the assault on tech and is now cracking down on big business, data, privacy and pretty much everything else the length and breadth of the country. It now appears less likely that we will see any kind of improvement in US-China relations or be able to reap the benefits of economic collaboration between the two nations. A number of trade deals and treaties are now off the table, and it is highly unlikely the Chinese stock market will enjoy any higher level of integration with Western markets any time soon.

Jinping’s announcement that he was going to remain in office even once this standard ten-year tenure had ended was doubtless a good indication of his true and longer-term intentions for the direction of policy. The man who oversaw the expansion of the country’s economy and the booming success of many digital companies now seems to have changed tack and is far more concerned with regulating and censoring certain businesses and sectors.

President Xi’s removal of dissidents in Hong Kong, his camps for re-educating Muslims in western China, the harsh tactics with which he deals with any potential challenges to his regime and a number of other humanitarian issues are all causes for concern in the Western world.

In other developments, China has now partly shut down the world’s third-busiest container port after a worker became infected with the Delta variant of Covid-19, threatening more disruption to an already fragile trade route and supply chain.

Good news for retail and travel… finally!

Although the pandemic has caused chaos for numerous companies involved in the global travel industry, there are now some positive signs: many airline companies, hotels and cruise line providers say that holiday demand is “returning strongly” and bookings have seen significant increases.

The vaccination rollout is starting to pay off for the travel sector: fully-vaccinated travellers from the US and the EU are now allowed to go to a number of countries (including the UK) without having to quarantine. That said, the US Centre for Disease Control and Prevention continues to warn US citizens against such travel. This ambiguity is likely to endure for some months to come.

Growth: not the rate that was expected, but growth nonetheless

In the UK, the economy grew by 4.8% between April and June as businesses started to reopen post-lockdown. The biggest beneficiaries were restaurants and hotels, alongside companies in the retail sector. Although this figure was a little below the expected 5% – and the economy is still 4.4% smaller than it was pre-Covid – the UK recovery is real. Furthermore, investors have started to subscribe to that view by increasing their own exposure to UK assets.

In the US, inflation has hit 5.4% – partly attributable to rises in energy prices and the cost of used cars. However, the Federal Reserve Bank remains adamant that this is transitory, and has yet to give any clear indication of when it proposes to reduce its expansive monetary policy measures (or even withdraw them altogether).

Meanwhile, the US Senate has passed a comprehensive US$1 trillion infrastructure bill that will provide much-needed support for the country’s deteriorating transport system. This is a huge step for the Democrats as they try to push President Biden’s sweeping economic agenda through Congress.

What changes will the forthcoming European elections bring?

In Europe, the outcomes of forthcoming elections in Germany, Italy and France could significantly alter the political backdrops of these EU countries. Nevertheless, from a short-term investment perspective, the developed markets of the UK, Europe, Japan and the US seem more appealing than those of Asia and the emerging markets: indeed, uncertainties over China’s next regulatory steps and rising cases of the Delta variant have created confusion in a number of regions.

Overall, we remain bullish on most global equity markets. Inflationary pressures are clearly building – something we should continue to bear in mind. The Federal Reserve Bank remains convinced that these pressures are transitory, and that inflation will plateau out before eventually falling. This is its way of justifying its decision to keep interest rates low and continue with its monthly bond-buying programmes. There is no evidence of any kind of summer lull in the markets for global investors so far this year. Indeed, the global economy is powering ahead – despite the resurgence of Covid-19 cases, inflationary pressures and China’s regulatory crackdowns. Consequently, investors who have embraced risk have been generously rewarded. Having said that, a measure of care and mindfulness is likely to serve investors well over the coming weeks. Or at least until we know whether the Fed might change course at some point this autumn or towards the end of the year.

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