Busy week before the usual August lull | Calamatta Cuschieri

Last week’s market action was one of the busiest so far this summer, with a slew of corporate earnings announcements, important economic data releases, a highly anticipated Fed meeting and another regulatory-induced sell-off in Chinese equities.  There was a lot of push and pull with equities finishing slightly lower to where they started the week, but still near all-time highs.

In terms of economic data, the initial estimate of second-quarter GDP showed that US economic activity reclaimed its pre-pandemic peak and accelerated from the first quarter.  Nonetheless, the 6.5% annualised reading was meaningfully slower that the 8.4% pace predicted by economists.  The drag on growth came from a decline in inventories, housing investment, government spending, and a wider trade deficit, as imports rose faster than exports.

Despite the headline miss, consumer spending, which represents around 70% of overall demand, was stronger than expected, growing at 11.8%.  The reopening of the economy, aided by vaccinations, pent-up demand and a rundown of pandemic savings, powered spending higher. 

Growth in the second half of the year will become more challenging as the economy transitions from recovery to expansion.  Against this background, the IMF still sounded rather optimistic when it updated its world economic outlook last week, announcing a growth of 6% in 2021 and 4.9% in 2022 (0.5 points higher than expected).

Meanwhile, earnings releases were in full swing over the course of last week, with about a third of the S&P 500 companies reporting results, including the biggest tech names.  In general, companies continue to top estimates at record levels driven by the strong rebound in demand and elevated profitability levels.

The highly anticipated earnings reports from several mega-cap tech companies were solid but not without blemishes, and share prices, excluding that of Alphabet, declined.  Amazon, Apple, Alphabet, Microsoft and Facebook, which together make up 22.5% of the S&P 500, on average doubled their earnings from last year.  Nonetheless, comparisons will get harder in the second half of the year, and the bar of expectations is high after a sharp rally in prices since the middle of May. 

Outside of tech, earnings of stocks that are more closely tied to the business cycle have been recording the biggest upside surprises, supporting the case for sector and style diversification.

Elsewhere, the July’s Fed meeting was unsurprising uneventful, with the central bank making no changes to policy rates or its asset-purchase program.  However, the Fed’s  statement did note that progress has been registered toward the employment and inflation goals, hinting that policymakers are closer to tapering bond purchases. 

Market expectations are that the Fed will announce their intention to start removing some of the extraordinary accommodation over the coming months, with the actual implementation at the end of the year or the beginning of the next.  The Jackson Hole symposium scheduled between 26th to 28th August will be scrutinized for hints on upcoming Fed policy changes in this regard.

Over in China, the authorities continued their regulatory crackdown on various sectors, with the focus last week turning to private education.  This has dragged the MSCI China Index down 26% from its February peak this year and triggered a 13% three-day decline last week.

To compensate for the regulatory risk, investors are likely to assign a higher-risk premium and continue to demand a deeper discount to own Chinese equities.  With uncertainty lingering, the outlook is likely to stay clouded for a while.  However, the stock-market rout could trigger additional steps by China’s central bank to ease liquidity.  Also, the government could take steps to calm the markets and reassure investors that further actions won’t be applied broadly.

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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