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June 2021 Monthly Market Commentary: Strong global economic data despite Covid variant threat

06 July 2021

MARKET CONTEXT: Strong global economic data despite Covid variant threat

Global Macro:  Global macroeconomic data continued to be positive in June in most regions of the world. The US labor report for the month showed nonfarm payrolls increasing by 850k, beating consensus expectations of 700k, while the unemployment rate stabilized just under 6% (5.9% in June; vs consensus: 5.7%). As the economic situation normalizes in the US, the Federal Reserve signaled two potential rate hikes in 2023. As such, the range of the Fed funds rate could increase from 0-0.25% at present to 0.25-0.50% then 0.50-0.75% by end-2023. Meanwhile, annual inflation in the Eurozone eased to 1.9% YoY in June (vs 2.0% in May). We believe the rise in inflation witnessed in the US since the beginning of the year – largely driven by higher energy prices, Covid-related supply disruptions, and a low-base effect – will also start to ease from June onwards. In the meantime, China has experienced the strongest economic recovery in the world with retail sales up 15% YoY and exports growing 30% YoY on the back of pent-up external demand. The manufacturing and services sectors continue to expand rapidly. Overall, China’s GDP increased 18.3% YoY in Q1 2021, beating all other major economies. On the pandemic front, vaccination has made significant progress in Europe, North America, and China. However, the spread of new, more aggressive Covid-19 variants, in particular the Delta variant, could delay the full reopening of most economies.

Financial Markets: 

The overall global macro environment remains positive for risky assets in general and equity markets in particular. We believe financial markets are benefiting from three main factors: first, the progressive reopening of economies, country by country, which will underpin economic growth and corporate earnings; second, the fact that inflation is most likely temporary; and third, central banks’ accommodative monetary policy, which will continue to support the economy in the foreseeable future.

Equity: Month to date the S&P 500 rose 1.8% amid the US strong economic rebound; Euro Stoxx 50 +0.2%, Hang Seng Index -1.1%. Fixed Income: The 10-year US yield further contracted 10bps in June to 1.48%, which contributed to the rise in Emerging Market government bonds denominated in USD (+0.3%; vs -0.9% in local currencies). High-yield corporate bonds also increased 0.4% in EUR and 1.2% in USD. Currencies: The US dollar regained strength in June, following a Fed meeting that pointed to earlier-than-expected policy tightening: EUR -2.5%, CNY -1.3%, AUD -3.0%; safe-haven JPY -0.8%, CHF -2.5%. Commodities: Oil prices continued to rally in June amid the global recovery while gold suffered from the US dollar strength: WTI Oil +9.9%, Gold -7.7%.

Risks: The main risk to the global economy is the increase in Covid-19 variant cases around the world. At this stage, the total number of new cases is declining but a potential new wave of infections remains the main headwind to the economic recovery.

Opportunities: