Market Update from the Global Asset Allocation Team – July 2021
Sentiment wavered somewhat in June, with growing optimism on the reopening and the recovery at odds with fears about the emergence of the highly-transmissible delta variant. Meanwhile, investors shrugged-off the latest spike in inflation data and appear to be aligning with the Federal Reserve’s view that near-term pricing pressures are transitory and thus will not prompt a premature withdrawal of monetary policy support. Indeed, several Fed officials have walked-back on the hawkish-leaning undertones from the June policy gathering and have emphasized that the recovery is still far from complete, while also stating that the central bank will not raise interest rates pre-emptively.
Global equity markets marched higher in June, with strength in North America at odds with some softness abroad. The reflationary rotation from growth to value faltered somewhat, with technology stocks ripping higher and leading the performance charge as long-term bond yields edged lower. This stellar performance saw the tech-heavy S&P 500 hit a fresh record in June. Meanwhile, the S&P/TSX performed in-line with the S&P 500 as robust gains in the energy sector buttressed the oil-levered TSX. By contrast, emerging market stocks extended their stretch of underperformance given the lacklustre pace of the vaccine rollout and the relatively mediocre monetary and fiscal response from developing market policymakers versus their developed market peers.
North American bond markets posted positive results in June. Yield curves flattened, with long-term yields tumbling lower as traders remained at ease about the inflation backdrop, while short-term yields rose as investors brought forward their expectations for fed funds liftoff. Of note, market-based inflation expectations moderated, with the 10-year breakeven rate slipping to 2.34% (from 2.59% in May). The 10 year treasury yield fell by 13 basis points to 1.47%, while the 2 year treasury rose by 11 basis points to 0.25%. Consequently, the spread between the 10- and 2-year treasury slid to 122 basis points, its lowest since February.
The US dollar (DXY) jumped close to 3%, marking its best monthly gain since March 2020. The surprisingly hawkish outcome from the Federal Reserve policy gathering saw the greenback advance versus all of its major trading partners, while some pent-up fears over the coronavirus variant prompted demand for the haven currency throughout the month. The euro slid to the lowest since April after ECB President Lagarde said that it was premature to reign-in policy support and that stimulus must continue well into the recovery. The Canadian dollar also lost some momentum even in the wake of the remarkable strength in oil prices. After breaching 83 US cents in early-June, the loonie eased back to 81 US cents by month-end.
Gold slumped to the lowest since April as the Fed pulled forward its forecasts for interest rate hikes, while dollar strength also weighed on bullion prices. Copper also retreated amid concerns about Chinese demand following data that revealed a moderation in growth and credit flow, while the government’s vow to curb speculative demand also put some pressure on industrial metals. Finally, the profound global growth revival has fueled an unrelenting run in crude prices, with WTI oil hovering around $74/barrel at month-end, the highest since October 2018.