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US equity markets were up in June and led other developed markets, posting a stronger performance than Europe over the second quarter.
Inflation continued to be a major talking point, with the Federal Reserve (Fed) reaffirming that it is only a transitionary phenomenon as economies recover from the Covid-19 pandemic. However, during a heavily anticipated meeting, the FOMC (Federal Open Market Committee) shifted its guidance in a slightly hawkish direction. Economists expect tapering to begin in the first quarter of 2022, as inflation continues to run well above the Fed’s target rate and May CPI (Consumer Price Index) reports highlighted the sharp acceleration in global inflation.
Global growth in the first half of 2021 was strong, however gains have been inconsistent as vaccination programmes and supporting monetary policies vary according to region. Growth leadership has shifted away from China in favour of the US which is booming on the back of full-bodied monetary and fiscal stimulus and world-leading vaccination programmes.
The S&P 500 index rallied for the fifth straight month, not put off by the outcome of the FOMC meeting on the 16th June. The best performing groups were footwear, technology and semiconductors, while commodities suffered at the other end.
June saw further gains in European markets as economies showed strong signs of rebounding.
Eurozone business activity expanded at the fastest rate for 15 years in June after lockdown measures were lifted, according to the IHS Markit purchasing managers’ index. IHS Markit’s flash Eurozone Composite PMI rose to 59.2 in June, up from 57.1 in May, its highest level since June 2006 and well above most economists’ expectations. A reading of more than 50 indicates a majority of businesses reported an expansion from the previous month. Germany’s PMI hit 60.4 – the highest figure for a decade.
The unemployment rate fell by 382,000 in May, boosting optimism about a rebound in the region’s labour market as manufacturers said they were hiring at the fastest rate for twenty years. The third consecutive monthly fall lowered the bloc’s unemployment rate from 7.4% to 7.3%, Eurostat figures showed. The jobless rate has dropped from a peak of 7.7% in September last year but is still above a pre-pandemic low of 6.6%. The European Commission’s monthly business survey showed employment expectations at eurozone companies, in both the services and manufacturing sectors, rose to the highest level since 2018.
Stocks were buoyed by a rise in German exports to the US and China in May. According to the latest figures from the German statistics office, shipments to the US rose almost 41% year-on-year to €9.1bn, while exports to China, Germany’s second-biggest market outside the EU, rose 17.7% to €8.4bn. In France, the business climate index from Insee climbed 5 points to 113, above its pre-Covid level of 105 and its long-term average of 100. The improvement was driven by higher confidence in the service industries.
The UK equity market made modest gains in June as the UK economy continued to show signs of a recovery driven by the continued successful vaccination rollout and positive economic data. However, rising cases of the Delta Covid-19 variant delayed the lifting of remaining restrictions.
The Office for National Statistics (ONS) released data in June showing that the U.K. unemployment rate fell to 4.7% in the February to April period. This marked the fourth straight month of declining unemployment after the figure was measured at 4.8% between January and March. Payrolls statistics were also upbeat, with the number of employees increasing for the sixth consecutive month.
Data also showed that the UK manufacturing output volumes in the three months to June grew at the fastest pace for 46 years, according to the latest monthly CBI Industrial Trends Survey. This was also evidenced by total order books in June reaching their strongest output since 1988, while export order books were at their highest level for more than two years.
The Monetary Policy Committee decided to keep its benchmark interest rate at an all-time low of 0.1%. However, it warned inflation would surpass 3%, well above its target of 2%, as the economy reopens from coronavirus-related lockdowns. Officials insisted that the surge in prices will be transitory and will eventually drop down to its 2% target.
Asian equity markets struggled as repercussions of recent renewed spikes in Covid-19 cases were reflected in weaker economic data. The unexpectedly aggressive outcome of the FOMC (Federal Open Market Committee) meeting led to some outflows in the first half of the month, which were recovered in the second half.
China equity markets lagged in June, underperforming the MSCI World and Emerging Markets (EM) indices. Like many equity markets, the outcome of the June 16 FOMC meeting, which unveiled a more hawkish attitude towards the growing inflation rate, triggered concerns. Non-manufacturing PMI (Purchasing Managers’ Index) lost momentum as the Guangdong province saw an uptick in new Covid-19 infections.
Meanwhile, Hong Kong equity markets retreated with the fall caused by the poor performance of Chinese property and financial companies. A delayed reopening of the Hong Kong-Macau border, as well as weak June GGR (Gross Gaming Revenue) data due to restricted travel from Guangdong weighed heavily on the Macau casino sector. Autos and healthcare however saw the biggest inflows, pushed by accelerated vaccination progress.
Taiwan equity markets surpassed pre-Covid levels in June as the rate of new cases continues to decline since its peak in May – manufacturing PMI data did nonetheless fall as near-term virus ramifications were still felt. For the fifth month in a row, non-technology outperformed technology, and shipping outstripped semiconductors which continue to face a shortage. Meanwhile, Japan’s June PMI data beat forecasts and signalled a continued expansion in manufacturing and the services sector.
Emerging Market (EM) equities posted the fifth straight quarter of quarter-on-quarter gains. However, on a monthly basis, EM markets finished flat in June and underperformed developed markets.
EM markets faced pressure from the underperformance of EM currencies, as well as hawkish discussions about the Federal Reserve’s tapering of monetary policies. This, along with continued Covid-19 cases, took its toll on most of the major EM regions. Despite this, the latter half of the month saw a recovery after the release of Biden’s infrastructure plans. Commodity-orientated markets, such as Colombia, Brazil and Russia, benefitted from rising oil prices which are up more than 10% month-on-month.
Latin American equities were up this month and outperformed Europe as well as developed markets. Colombia led gains, posting strong returns which were followed by Brazil and Argentina; it was less positive for Peru, Chile and Mexico which underperformed. The Brazilian Real saw the greatest appreciation against the dollar, and the country’s performance was supported by stronger global growth and a more resilient vaccination regime. Mexico continues to battle against inflation which stands at an annual rate of 6% as of June. The country’s central bank, Banxico, revised up inflation and growth forecasts despite hiking interest rates by 0.25%.
In Eastern Europe, Russian markets rallied thanks to an oil price rally and a fading of geopolitical risks. However, the decision to cut the USD from its oil fund came as a retaliation against continued US sanctions upon Russia.Back To News & Insights