July saw a month-long rally in US equities run into some headwinds in the final week of the month. The Chinese regulatory crackdown on US listed companies began to create some trepidation for investors on those stocks and a heavy IPO issuance persevered. Robinhood's remarkable reception suggested that investors still have an appetite for the plethora of equity supply, with the stock trading up to $85/share after trading around $33/share just days earlier.
In Australia, the ASX200 gained +1.2% in July and is up over +14.2% since the beginning of 2021. The ASX200 underperformed indices in the US (+2.5%) and Europe (+1.6%) in July, but outperformed Emerging Market (EM) indices which lost ground (-6%) in the month. The losses in EM can be largely attributed to the sell-off in Chinese and Technology stocks on the main, which reverberated locally with Technology (-7.1%), Energy (-2.7%) and Financials (-1.5%) listed on the ASX200 trading lower in the month. The Materials sector gained ground in July (+7.2%), as did Industrials (+4.4%).
July 2021 Summary:
- Headline inflation in Australia popped in the second quarter to +3.8% annually, which is the strongest in over a decade
- Large and Mega-cap growth stocks outperformed in July compared to Small and Micro-caps, which lagged
- US 10Y Treasury yields continued lower in the month, which aided growth stocks but weighed on financials
- COVID-19 cases continued to surge across the globe as the Delta variant takes hold
- Global inflation has continued to rise, which has caused the IMF to warn of possible longer-term issues
- US equities once again traded to record highs during July despite a resurgence of global COVID-19 cases
Australian Economy:
The challenged vaccination rollout and repeated state-based lockdown measures continue to dominate headlines in Australia. The state of New South Wales is experiencing severe lockdown measures as daily COVID-19 case numbers continue to track higher. The Australian economy is expected to contract sharply in the third quarter but is likely to be short-term, as has been the case with prior lockdowns in Australia. The unemployment rate in Australia dipped to 4.9% for the last reading in June, which is below the RBA's mid-point forecasts for the year. Some analysts expect the unemployment rate to increase slightly in the months to come, largely dependent on Government support to keep workers employed during the lockdowns in certain states. Analysing the decline in total hours worked in the labour market might be a better way to view the situation, rather than the total employed figure.
The US Fed:
The US Federal Reserve has remained steadfast in its belief that emergency monetary policy measures will continue until year-end at the very least. The most recent FOMC statement reiterated that progress had been made towards the goals required before tapering will commence, although concerns around the increasing spread of the Delta variant weigh heavily on the committee member's minds.
US Corporate News:
In earnings news, the final week of July saw US heavyweights deliver quarterly earnings reports, with technology names front and centre. Alphabet shares popped higher after the search juggernaut reported strong numbers, announcing that YouTube's ad revenue almost doubled on the back of a rebound in digital ad spend. Microsoft performed well with earnings and revenue, beating market expectations. Facebook signalled its sales growth would decelerate as the Apple iOS privacy changes weigh the company's outlook, while Amazon shares fell sharply as the company missed revenue expectations and issued a soft outlook.
Interest Rates:
Although inflation has been trending higher, US 10Y bond yields have continued to fall in July, leaving many market participants perplexed. The market could be pricing in lower future economic growth, which is already showing signs of slowing at the end of the month with Real GDP coming in at +6.5% in Q2, which was -1.9% below consensus estimates. Gold, which some consider a hedge against inflation, only saw modest gains in the month but has trended lower since after hitting all-time highs back in August 2020.
US Housing Market:
The extreme surge seen in lumber futures has all but retraced its gains in the last two months. After Lumber futures traded to highs above $1,700 per MBF in May, they closed out the month of July around $625 MBF, down over -62% from the highs in May. Home prices have not followed suit, with an increase seen in the average home prices across the country. The 20-city home price composite index by Case-Schiller notched new highs in July, adding +1.82% on the month, and +17.1% year over year.
Cryptocurrency:
After the bouts of volatility seen in April and May, Bitcoin has consolidated much of the selloff and is began to track sharply higher in the final week of the month, and reclaimed the key $40,000 level. Ethereum has also seen some price appreciation so far in the third quarter, trading close to the $2,500 level. According to Goldman Sachs Research, Ethereum has experienced the most network growth since 2018. The research notes that one way of valuing cryptocurrency is based on their 'underlying distributed networks', in the same way that social media companies valuations can be based on average monthly active users. Based on this methodology, Bitcoin's value has risen far higher than its network growth compared to Ethereum.
Looking Ahead:
Equities in major US bourses remain near recent highs, but it's worth keeping an eye on the surging global COVID-19 Delta variant cases. Rising interest rates and inflation is another potential warning sign but not an immediate threat at this moment. Much has been thrown at equities to potentially dampen sentiment, though they keep tracking higher. Robust earnings, low interest rates and monetary/fiscal support to match mean that stocks should continue to find support in the short-term.