Global equity markets were mixed for the month as volatility rose mid-month. While most developed markets posted positive returns, China led emerging market indexes sharply lower. Credit spreads at the riskiest end of the spectrum moved higher. Investors sought refuge in safe haven assets, which led to lower bond yields and higher gold prices.
Global growth remained strong and the inflation surge continued. Highly vaccinated countries, such as the UK, found it easier to deal with another surge in COVID-19 cases compared to six months ago. The UK proceeded to fully reopen its economy. In spite of this encouraging news, markets got the jitters over the more contagious delta variant undermining the global recovery given how many countries have low vaccination rates and remain vulnerable to restrictions returning, as happened in a number of emerging countries such as South Africa and Indonesia.
Forward-looking purchasing manager indices indicated that growth in countries that reopened their economies earlier this year, such as the US and UK, started to stabilize at high levels. Meanwhile, the Eurozone and other areas that were behind the curve still have space to rebound further as they follow a similar reopening trajectory and continue to support aggregate global growth. The inflation surge showed no sign of abating. Central banks stuck to their narrative of base effects and ongoing supply constraints, suggesting that they expect inflation to be transitory and dissipate as both demand and supply gradually normalize.
Nevertheless, the Federal Reserve recognized that the strong economic expansion in the US does not warrant such loose monetary policy and announced that tapering of asset purchases might begin later in the year subject to employment, even if interest rate increases are unlikely in the near-term. The European Central Bank offered dovish forward guidance as a more inflationary mandate came into effect. China’s central bank cut its reserve requirement ratio by 50 bps. On the fiscal side, the US Senate moved forward with a proposed bipartisan infrastructure bill for further discussion.
Geopolitical tensions between the US and China took a turn for the worse over the month amid a statement by the US accusing China of cyber espionage, saber-rattling by China over Taiwan and an unconstructive meeting between senior level officials of the two countries.
Within China, the regulatory crackdown on tech companies continued with individual companies and even entire sectors being suddenly targeted with heavy handed regulations. This increased uncertainty across the entire tech sector and beyond and pushed Chinese offshore shares into correction territory. Doubts over the sustainability of the recovery also hurt commodity producing countries such as Russia and Brazil. Overall, this led to the worst month for broad emerging markets since last year’s COVID-19 sell-off.
Investor worries over the global recovery also affected sentiment for cyclical commodities. This led to strong US dollar performance against currencies of commodity exporting countries such as Australia, Canada, Brazil and South Africa. Oil moved sideways over the month. OPEC agreed to increase supply to meet higher expected demand.
Mercer's Monthly Market Monitor provides an overview of global financial markets.
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