Global stocks had a mixed week, with fears of an economic slowdown in China and worries linked to the spread of the Delta variant of Covid-19 weighing on sentiment. Meanwhile, bonds surged.

UK

The FTSE 100 closed the week unchanged.

The UK government announced that it still planned to remove all restrictions in England from 19 July – although face coverings will still be recommended indoors. Covid-19 infections, hospitalisations and fatalities continued to increase, although there was some evidence that the pace of increase in new infections may be slowing. Self-isolation rules are also to be eased from mid-August for those who have had two inoculations.

UK GDP expanded by 0.8% in May. The growth rate was weaker than had been expected as stalling activity in retail, construction and manufacturing (due to labour shortages, supply chain bottlenecks and global microchip shortages) offset a strong rebound in the hospitality and leisure sectors. The UK economy is now 3.1% below its pre-pandemic level, the narrowest gap since the start of the crisis.

UK consumers appear to be becoming more cautious as the Delta variant drives up infection rates, with spending falling in June and visits to retail and entertainment hubs tailing off.

After the flop of the Deliveroo IPO, Wise (previously known as TransferWise) was valued at nearly £9bn in a direct listing in London.

US

The S&P 500 increased 0.2% over the week. Stocks sold off sharply mid-week amid concerns that US GDP growth will peak in the second quarter of 2021. The fall in bond yields also caused further rotation in high growth tech stocks. On a year-to-date basis, growth stocks in the S&P 500 have now outpaced value stocks, having lagged for the first few months of 2021.

Minutes of the latest Federal Reserve meeting showed that policymakers thought “uncertainty around the economic outlook was elevated” with officials engaged in a fierce debate about whether the US economy was on firm enough footing for the central bank to begin considering a reduction of its $120bn a month of emergency debt purchases. One Fed official warned that the spread of the Delta variant and low vaccine rates in some parts of the world pose a threat to the global economy.

The ISM non-manufacturing purchasing managers’ index fell to 60.1 in June from a record high of 64.0 in May. The reading was the weakest since February as businesses grappled with higher prices and labour shortages. The manufacturing index grew at its slowest pace since January in June as factories struggled because of supply chain bottlenecks.

Philip Morris International paid £1bn to buy Vectura, a UK pharma group that allows medicines to be inhaled. This marks the US tobacco giant’s first step towards becoming a healthcare and wellness company.

S&P 500-listed companies are expected to report aggregate earnings growth of 65% in the second quarter of the year compared with the same period in 2020.

Europe

The FTSEurofirst 300 eased 0.2% over the week.

The EU raised its growth forecasts to 4.8% this year and 4.5% in 2022. This would mark the most rapid expansion seen since 1976. The German economy is projected to grow 3.6 % this year, while France will expand by 6% and Italy by 5%.

The European Central Bank (ECB) changed its inflation target for the first time since 2003. The new target of 2% is symmetric, “meaning negative and positive deviations of inflation from the target are equally undesirable”. The shift that gives policymakers flexibility to keep interest rates at historic lows for longer, with the ECB pledging to tolerate any slight overshoots.

Minutes of the latest ECB meeting showed policymakers engaged in a lively debate last month over whether to slow the pace of its emergency bond purchases. More conservative “hawks” called for asset purchases to be scaled back in response to the brightening economic outlook and improved financing conditions, while more “dovish” proponents of loose monetary policy resisted such calls.

German industrial production fell 0.3% in May, largely because of supply problems with crucial materials.

The IHS Markit eurozone purchasing managers’ index for services rose to 58.3 in June, its highest level since July 2007. Spain and Italy were particular bright spots.

European companies are predicted to double average profits in the second quarter of 2021 compared to the same period in 2020.

Japan

The Nikkei 225 rallied 3.0% over the week.

The Japanese government announced that Tokyo will be under a state of emergency for the Tokyo Olympics, which are due to start on 23 July. The games will go ahead without spectators.

Pacific Basin ex Japan

The People’s Bank of China cut banks’ reserve ratio requirements by 50 basis points. Investors took that as a signal that Chinese second-quarter GDP data due next week might be weaker than expected.

Didi, which raised more than $4bn in a New York IPO, lost one-fifth of its market value after the Cyberspace Administration of China ordered Didi to remove its ride-hailing app from the Chinese market. Beijing also broadened its crackdown on tech platforms to include Boss Zhipin, an online recruitment company, and Chinese truck-hailing apps Yunmanman and Huochebang.

Governments across the Asia-Pacific region are reimposing restrictions to limit the spread of the Delta variant. Indonesia extended lockdown measures as its healthcare system faces increasing strain; Australia has been forced to extend its lockdown of Sydney; South Korea unveiled its highest level of restrictions across Seoul and surrounding areas.

Emerging Markets

Turkish inflation climbed to a two-year high of 17.5% in June.

Mexico’s government awarded control of one of the country’s biggest oil discoveries to state-owned Pemex, dealing a blow to private investment and raising the prospect of international litigation. A consortium made up of Talos Energy of the US, the UK’s Premier Oil and Germany’s Wintershall DEA discovered the almost 700m-barrel Zama field in 2017 and have invested $325m in the project to date.

Bonds

The yield on the 10-year US Treasury bond fell as low as 1.28% during the week – a level last seen in February – before closing the week at 1.34%.

The 10-year German Bund yield dropped to -0.29%, its lowest level since early April.

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Image by Gerd Altmann from Pixabay