Sep 19, 2021|Market Insights- 10 min
1. The Federal Reserve (the “Fed”) signals policy reversal at year-end
2. Central bank policies unchanged despite inflationary signs
3. US economic growth is slower than expected
4. Equities continue rise amidst low-rate environment
5. Sentiment declines amid COVID-19 concerns
6. Vaccination progress continues, but Delta variant spreads
Policy & Geopolitics
The Fed signals likely policy changes this year
In its July meeting, the Fed reached a general consensus to begin reducing their $120 billion in monthly asset purchases this year. Since the pandemic hit in March 2020, interest rates were kept near zero with target inflation moderately above 2% as the economy improved with low unemployment and stable inflation.
On August 27, Fed Chairman Jerome Powell indicated that the economy no longer needs policy support, and tapering bond purchases may begin by year end despite the “near-term risk” presented by the Delta variant. Powell also reaffirmed the belief of the Fed that inflation is temporary and should moderate in the coming months.
Meanwhile, the House of Representatives approved narrowly a $3.5 budget plan on August 24 and set a September 27 deadline for the vote. The vote enables Democrats to employ the process of reconciliation to pass the budget without Republican votes.
On July 8, the European Central Bank (the “ECB”) announced a new policy framework that may prolong easy monetary policy, changing the inflation target to 2% (instead of just below 2%) while keeping interest rates at -0.5% as the Delta COVID-19 variant cases surged. ECB president Christine Lagarde indicated that easy monetary policy will be maintained for the foreseeable future. The asset purchase program will be discussed in the September 9 monetary policy meeting. On August 31, preliminary estimates showed that inflation in the euro zone increased 3%, which represents a 10-year high. This is likely to put pressure on the ECB, especially after the indication of tapering by the Fed.
President Biden’s $4 trillion-plus budget deal
The deadline for voting on President Biden’s roughly $3.5 trillion budget deal, which is accompanied by $1 trillion of infrastructure spending on the electrical grid, transit, roads, bridges, etc., is on September 27.
The budget deal, which includes spending on antipoverty, education, childcare, and climate change over the next decade, is the result of extensive negotiations between progressive Democrats who proposed a $6 trillion package and moderates who preferred a smaller $2 trillion deal.
The budget deal includes paid family and medical leave, subsidized childcare, an extension of an expanded child tax credit, affordable housing, etc.
The proposal raises the corporate tax rate from 21% to 28% and the top capital-gains rate from 23.8% to 43.4% to cover the cost of the spending package over 15 years.
Labor market recovery accelerates
The US labor market strengthened in July despite challenges posed by the Delta variant and a tight labor supply. Unemployment fell to 5.4% in July from 5.9% in June, the lowest since the onset of the pandemic in March 2020. Non-farm payroll rose by 943,000 in July, marking the strongest monthly growth in 11 months amid the accelerating economic recovery. Weekly initial unemployment benefit claims edged slightly higher in the week ending August 21 from the previous week, to 353,000, but is still around pandemic-lows. Meanwhile, COVID-19 cases surged across the US and some local governments reinstated mask mandates and other restrictions. June 2021 euro area unemployment dropped slightly to 7.7% from 7.9% in May, the lowest since May 2020 amid the easing restrictions.
Growth continues but a slowdown is expected
Q2 2021 annualized US GDP was revised up to 6.6% from the initial reading of 6.5% in Q2 2021, driven by business reopening, widespread vaccinations, and government aid, indicating that the US economy has emerged from the pandemic despite rising COVID-19 cases. US economic growth is expected to ease gradually this year amid COVID-19 variants, rising inflation, supply chain disruptions, and a shortage of workers.
US retail sales fell 1.1% in July as consumers shifted their spending from goods to services as widespread vaccination continued and COVID-19 related restrictions eased.
Existing U.S. seasonally adjusted annual home sales rose 2% in July from June to 5.99 million. Strong demand continues, but the housing market boom is beginning to ease slightly as rising prices drive more homeowners to list their houses for sale.
Preliminary Eurostat data show that the eurozone economy grew 2% in Q2 2021, up 13.7% YoY following two consecutive quarters of contraction as COVID-19 restrictions eased and vaccinations accelerated. But the euro zone economy remains about 3% below pre-pandemic levels and further recovery depends on the surge of infections in the Delta variant in many countries.
The Consumer Price Index (CPI) increased 5.4% year on year (YoY) in July, in line with the rate in June which is the highest yearly rate since August 2008. Core CPI, which excludes food and energy, climbed 4.3% YoY, driven by booming consumer demand amid supply shortages, price recovery in the hard-hit service industry, and pent-up demand for travel and restaurants. CPI in the euro area increased 2.2% YoY in July, the highest since October 2018, surpassing the 2% target of the ECB while core inflation fell to 0.7% in July from 0.9% in May.
The IHS Markit US Manufacturing Purchasing Managers’ Index (PMI) fell to 62.1 in August from 63.4 in July. The IHS Markit Euro Area Manufacturing PMI fell to 61.5 in August from 62.8 in July.
Sovereign bonds yields fall amid COVID-19 concerns
10-year US Treasury yields dropped to 1.15% on August 2, their lowest since February 2021, after economic data indicated slowing growth and growing concerns about the Delta variant. On August 27, yields declined slightly to 1.3% after rising again from their recent lows, as Fed Chairman Powell signaled that tapering may begin before year end. 10-year inflation expectations, measured by Treasury Inflation Protected Securities, edged lower in August since peaking at 2.54% in May (the highest since 2013), but remain high at 2.39%. On August 26, Germany’s 10-year bund yields rose to a one-month high of -0.40%, ahead of Fed Chairman Powell’s summit and after ECB officials showed optimism for the euro zone’s economic outlook.
Equity markets rally on dovish tone by the Fed
US equities drifted higher through August, driven by strong Q2 earnings and continued accommodative monetary policy. On August 27, the S&P 500 and Nasdaq Composite climbed to record highs after Fed Chairman Jerome Powell said that although tapering will begin later this year, the decision to raise interest rates remains pending. The S&P 500 index closed above 4500 for the first time, rising 2.9% in August for a seventh consecutive month of gains. The Dow and the Nasdaq rose 1.2% and 4.0%, respectively, for the month.
European equity markets also rose in August. The STOXX Europe 600 rose 1.9% in seven consecutive months of gains, while the UK FTSE100 rose 1.0%. Asian equities also rose slightly this month. The Chinese SSE Composite Index and the Japanese Nikkei 225 Index rose 4.3%, 3.0%, respectively, while the Hong Kong Hang Seng index fell 0.3%.
Credit spreads widen as investors worry about COVID-19
Investment grade spreads widened slightly to 0.92% at the end of August from 0.91% in July as investors continue to worry about the Delta variant. High-yield spreads ended at 3.17% from 3.23% in July but remain well below levels earlier this year. First-lien and second-lien spreads to maturity widened to LIBOR + 4.12% from LIBOR + 4.09% and LIBOR + 7.18% from LIBOR + 7.12%, respectively. The yield-to-maturity of first- and second-lien debt remains below year-end 2019 levels due to near-zero interest rates and unprecedented Fed support for the fixed income market.
Oil price recovers from longest losing streak
Spot WTI and Brent crude oil prices fell from $73.95 and $75.41 per barrel, respectively, in July to $68.51 and $72.96 at the end of August, in its first monthly loss since March after its worst week since October. On August 9, Spot WTI and Brent crude oil traded as low as $65.15 and $66.48, respectively, amid a strengthening US dollar, concern over the Delta variant and demand uncertainty. Demand is expected to decline following Hurricane Ida which caused significant damage to oil rigs and refineries.
Last month, OPEC Plus agreed to raise output gradually over the next two years, which may continue to pressure prices as demand increases. OPEC will increase daily production by 400,000 barrels each month until the end of 2022. After being urged to boost output by the Biden Administration, OPEC members said that they see no need to accelerate output. OPEC Plus will meet on September 1 to discuss the agreed output increase.
US dollar falls, gold steadies, and Bitcoin rises
The US dollar rose to a more than nine-month high of 93.73 against a basket of currencies on August 19, as investors worry about the Delta variant just as the Fed begins to reverse its policy. At month-end, the dollar fell to 92.40, its lowest in more than three weeks, as investors awaited the response of the Fed to the US job report. Meanwhile, gold prices fell amid a stronger dollar to $1,779 per ounce on August 19, following indications from the Fed that stimulus would ease this year. After the dollar’s decline at month end, gold rose slightly to $1,817 per ounce at the end of August. On August 23, Bitcoin surged past $50,000 for the first time in May, before easing to $47,169 at month-end.
Consumer sentiment fall amid Delta fears
The Consumer Sentiment Index of the University of Michigan fell to 70.3 in August, the lowest during the pandemic and since 2011 as the spread of the Delta variant across the US led to the reinstatement of restrictions in some states.
The VIX index surged to 21.7 in August before subsiding to 16.10 at month-end from 18.24 in July.
The month-end Fear and Greed Index (which uses seven factors including market momentum, safe-haven demand, and junk bond demand) showed “greed” at 58 as investors rotated into stocks from the relative safety of bonds.
Global daily COVID-19 cases surged with the spread of the highly contagious Delta variant, first identified in India.
The Delta variant represented more than 93% of new infections in the US with unvaccinated people comprising the majority of severe cases. The US Centers for Disease Control and Prevention (the “CDC”) recommended that fully vaccinated people should return to wearing masks in public indoor spaces. COVID-19 hospitalizations in the US surpassed 100,000 in the last week of August, fueled by the Delta variant.
In Europe, governments continued to encourage vaccinations by restricting indoor dining and gym access to vaccinated people. European governments have been issuing vaccination “passports” to identify the unvaccinated population. The Delta variant became the most dominant strain across the region. On August 30,, the European Union recommended halting non-essential travel from the US due to the rise of COVID-19 cases.
Southeast Asia is now the global epicenter of the COVID-19 pandemic, as the Delta variant led to record infections and deaths in the region. The region is struggling to contain the virus as it battles low vaccination rates and limited medical supplies. Indonesia surpassed India and Brazil for having the highest rate of new infections.
On August 13, the CDC recommended vaccine booster shots to certain groups with weakened immune systems. The recommendation follows authorization by the US Food and Drug Administration of a third dose of the Pfizer or Moderna COVID-19 vaccines to immunocompromised people. Approval of all three COVID-19 vaccines (Pfizer, Moderna, and Johnson and Johnson) is expected in the US in mid-September.
The Month Ahead
1. Global vaccine rollout and booster shots
2. President Biden’s $4 trillion budget proposal
3. Fiscal stimulus in the US and Europe
4. Delta COVID-19 variant
This presentation is provided to you by The Family Office Co. BSC(c) (“The Family Office”) for informational purposes only, and contains proprietary information that may not be reproduced, distributed to, or used by, any third parties without The Family Office’s prior written consent.
All information, figures, calculations, graphs and other numerical representations appearing in this presentation have not been audited and may be subject to change over time. Furthermore, certain valuations (including valuations of investments) appearing in this presentation are subject to change as they may be based on either estimates or historical figures that do not reflect the latest valuation. Although all information and opinions expressed in this presentation were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to their accuracy or completeness. The information contained herein is not a substitute for a thorough due diligence investigation. Past performance is not indicative of and does not guarantee future performance. Exit timelines, prices and related projections are estimates only, and exits could happen sooner or later than expected, or at a higher or lower valuation than expected, and are conditional, among other things, on certain assumptions and future performance relating to the financial and operational health of each business and macroeconomic conditions.
The Family Office makes no representation or warranty, express or implied, with respect to any statistics or historical or current financial data, whether created by The Family Office through its own research or quoted from other sources. With respect to any such statistics or data delivered or made available by or on behalf of The Family Office, it is acknowledged that (a) the investor takes full responsibility for making its own evaluation of the materiality of the information and the integrity of the quoted source and (b) the investor has no claim against The Family Office.
Amounts in currencies other than the US Dollar are translated using prevailing market rates as calculated by The Family Office or its service providers and may differ from the rates used by banks. The rates are indicative only and do not reflect the rates at which The Family Office would be prepared to enter into any transactions with other parties.
Certain information contained in this presentation constitutes “forward-looking statements,” which can be identified by the use of words such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “plans,” “estimates,” “intend,” “continue,” or “believe” or the negatives thereof or other variations thereon or comparable terminology. To the extent this presentation contains any forecasts, projections, goals, plans and other forward-looking statements, such forward-looking statements are inherently subject to, known and unknown, significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond The Family Office’s control and may cause actual performance, financial results and other projections in the future to differ materially from any projections of future performance, results or achievements expressed or implied by such forward-looking statements. Investors should not place undue reliance on these forward-looking statements. The Family Office undertakes no obligation to update any forward-looking statements to conform to actual results or changes in The Family Office’s expectations, unless required by applicable law.
The Family Office makes no representation or warranty, express or implied, with respect to any financial projection or forecast. With respect to any such projection or forecast delivered or made available by or on behalf of The Family office, it is acknowledged that (a) there are uncertainties inherent in attempting to make such projections and forecasts, (b) the investor is familiar with such uncertainties, (c) the investor takes full responsibility for making its own evaluation of the adequacy and accuracy of all such projections and forecasts so furnished to it and (d) the investor has no claim against The Family Office.
This presentation represents a summary of certain information, the full terms of which are contained in a Private Placement Memorandum that should be reviewed for a more complete understanding of the investments and their risks. In addition, this presentation does not constitute an offer to sell, or a solicitation to buy, any instrument or other financial product, nor does it amount to a commitment by The Family Office to make such an offer at present or an indication of The Family Office’s willingness to make such an offer in the future.
The Family Office is a Category 1 Investment Firm regulated by the Central Bank of Bahrain C.R.No.53871 dated 21/6/2004. Paid Up Capital: US$ 10,000,000. The Family Office only offers products and services to ‘accredited investors’ as defined by the Central Bank of Bahrain.