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July 2021 Monthly Market Commentary: Cautious market sentiment amid China’s stricter regulatory stance

09 August 2021

MARKET CONTEXT: Cautious market sentiment amid China’s stricter regulatory stance

Global Macro:  Although global macro economic data continued to be positive in July, market sentiment has been dampened by China’s regulatory tightening in the tech and education sectors as well as a potential new wave of Covid infections around the world. Nonetheless, as vaccines seem to be efficient against new Covid variants, the risk of new lockdown measures is reduced. Meanwhile, central banks have maintained their accommodative stance. Although inflation increased in July (5.4% in the US), the Fed reiterated that the rise in inflation was temporary and thus interest rate hikes and bond purchase reduction would not be considered for the time being. As a result, yield curves in the US, western Europe, and China flattened with 10-year rates contracting in July, closer to 1% in the US and negative in Europe. Looking at GDP growth numbers, we note the US estimated Q2 GDP QoQ growth of 6.5% annualized fell short of consensus expectations (8.5%). In China, GDP expansion is on track to reach 8.5% this year, underpinned by pro-growth government policies and new accommodative monetary measures from the PBoC. In the Eurozone, GDP grew 2% QoQ in Q2, above market expectations of 1.5%.

Financial Markets: 

Corporate earnings beat expectations in Europe and the US in July, which supported their respective equity markets. By contrast, Chinese stocks dropped 14% due to tightened regulation on the tech and private education sectors. However, immediate communication from the Chinese regulator, reassuring global investors that China’s massive tech sector development plan was still on track, allowed the Chinese equity market to rebound towards the end of the month. The overall global macro environment remains positive for risky assets in general and equity markets in particular as the three pillars underpinning financial markets are still there: the progressive reopening of the world economy country by country, the fact that inflation is transitory, and central banks’ accommodative monetary policy.


Equity: Month to date the S&P 500 gained 2.6% amid strong corporate earnings whereas the Hang Seng Index  plunged nearly 10% following China’s tightened regulation on the tech and education sectors; Euro Stoxx 50 +0.4%. Fixed Income: The 10-year US yield further contracted 24bps in July to 1.24%, which contributed to the rise in High-yield corporate bonds in USD (+0.3%; vs +0.4% in EUR). Emerging Market government bonds edged up 0.1% in USD but fell 2.9% in local currencies. Currencies: The US dollar ended the month flattish with respect to both EUR and CNY while appreciating 1.4% against AUD; safe-haven JPY and CHF were up 1.0% and 1.9%, respectively, against the greenback due to growing concerns over the spread of new Covid variants. Commodities: Oil prices inched up 0.2% in July while gold rebounded 3.0% amid higher-than-expected US inflation.