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Taper talk, the Delta-driven slowdown and other items that caught our eye this week

This week’s rough patch may continue for a bit longer, but we still have a positive view on the cycle.


Our Top Market Takeaways for August 20, 2021.

Markets in a minute

While the losses aren’t anything major, it has still been a relatively poor week for most risk assets. Heading into Friday, the S&P 500 has lost ~1.4%, Japanese equities are down -2.5%, and both French and Hong Kong shares are down over -4%. Currencies that perform better in strong growth environments, such as the Canadian and Australian dollars and the Russian ruble, have lost value relative to “safe havens” like the U.S. dollar. Commodities levered to economic growth, such as crude oil, steel, copper and iron, have sold off. Sovereign bonds everywhere, from the United States to Sweden, to Singapore, have rallied.

While we believe this is probably just a rough patch in a longer uptrend for the global economy and equity markets, there are good reasons why risk markets are taking a pause.            

  • Taper talk gains steam. The Federal Reserve’s July meeting minutes released on Wednesday suggested that most members think the Fed can begin to taper its asset purchase program, which is meant, among other things, to ensure smooth market functioning by the end of the year. The problem? Investors are questioning if the economy can handle the Fed removing support on top of a Delta-driven soft patch in economic data.
  • About that soft patch… Most of the economic data released from China and the United States missed expectations this week. Chinese retail sales, industrial production and fixed asset investment all missed consensus expectations in July as authorities pursued aggressive measures to contain Delta outbreaks. In the United States, retail sales declined from last month and homebuilder sentiment soured. In fact, traditional data releases in the United States are coming in short of consensus expectations to the largest degree since the early days of the pandemic. More high-frequency measures of consumer spending are also showing a stall in restaurant reservations and travel spending. 
  • Delta continues to cause problems. Cases are still rising in the United States, though at a slower pace, and hospital resources are becoming stretched in some places, including Oregon, Alabama and Mississippi. Even though the latest data suggests protection against infection wanes over time, the vaccines are still proving to be highly effective at preventing severe illness and death (see the latest Eye on the Market from Michael Cembalest for more detail), and the White House is recommending a third dose of mRNA vaccines.
  • The bottom line for investors is that as we move through time, COVID-19 will likely impact a diminishing share of the global economy. Travel stocks and oil prices, for example, will continue to react to case counts around the world, and supply chains can be further disrupted if factories and ports are shut down due to outbreaks. Ford announced that it will temporarily halt production at a plant in Kansas City because it can’t get semiconductor-related parts due to an outbreak in Malaysia, and Toyota similarly slashed its production forecast. But as COVID becomes less novel and more endemic, the global economy will learn to adapt and live with it, largely because vaccines drastically reduce the risk of the most severe outcomes.

    In encouraging COVID news, some of the early Delta outbreaks, such as in Greene County, Missouri (Springfield), and Clark County, Nevada (Las Vegas), seem to be sustainably past their peaks. Hopefully, they will prove to be a leading indicator for places such as Louisiana, Alabama and Florida.
  • The China tech woes continue. Somehow, Chinese internet stocks lost another -10% this week, and are down a staggering -58% since their February peaks. We argued that Chinese assets were still investable a few weeks ago, but it is probably prudent for investors to take a diversified approach. To illustrate, spreads on bonds issued by Baidu are actually tighter now than they were in February, implying that there is lower risk of default in the market’s eyes, despite the equity market rout.   
  • Turmoil in Afghanistan adds to the uncertainty. But while the images and reports have been distressing, we have a hard time identifying a direct link to the global economy or financial markets from the U.S. withdrawal from Afghanistan. Afghanistan isn’t a major commodity producer, and history has taught us that geopolitical events in general tend to have a fleeting impact on markets. 

What could make matters worse for the equity market in the short term is that no one needs to be a hero right now. It’s the height of vacation season (seriously, how many out-of-office messages have you received this week?), the economic data is going through a soft patch (investors seem especially worried about what Delta could do to economies in Asia), and the S&P 500 is up over +15% this year (money managers could just want to get into the proverbial clubhouse without a mistake).

The six other “sell-offs” we have seen in U.S. equities this year have been brief, but we wouldn’t be surprised if it took a little bit more downside to entice the dip buyers this time. Whether or not this soft patch continues for much longer, we continue to have a positive view of this current cycle. We think investors should use their time wisely.

All market and economic data as of August 2021 and sourced from Bloomberg and FactSet unless otherwise stated.

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