Weekly View - Regulatory scare

PWM's view of the week ahead.

César Pérez Ruiz, Pictet Wealth Management

Weekly View - 2 August 2021

China's regulator continued to hold sway over Chinese stocks last week, after introducing new profit-restricting laws in the massive after-school tutoring business. A major selloff in Chinese equities ensued and market volatility went up. In a gesture to calm markets and reassure investors, the Chinese securities regulator met with the major domestic banks immediately following. All the same, we continue to prefer developed markets over emerging markets.

The EU economy grew faster than expected in the second quarter, posting 13.2% compared to a year ago, indicating the recovery is in full swing. Conversely, US GDP growth came in weaker than expected in the second quarter at an annualised 6.5%, compared to the 8.5% forecasters had predicted. Reassuringly, the almighty US consumer remains strong. Indeed, US consumer spending will be key to watch in the coming months as the Covid Delta variant takes hold. At its latest meeting, the Federal Reserve gave the first indications of potential tapering to its quantitative-easing policy. While this was as expected, it adds further confirmation that the economic conditions should allow for a gradual reduction in monetary accommodation. We note that the Fed's reverse repo facility has reached USD1 trillion, which might mitigate any initial market impact of tapering.

If GDP disappointed, US corporate earnings exceeded expectations, delivering strong estimates beat numbers. This has enabled markets to retain elevated valuation levels. Tech company numbers were especially strong, with a few exceptions among the biggest names. Meanwhile, M&A remains active, with talks currently underway between Italian bank UniCredit and Monte dei Paschi di Siena (MPS). MPS was the recipient of a government bailout in 2016 and is now considering selling parts of its business to UniCredit, an international banking group. We are positive on event-driven hedge fund strategies. Robinhood - with its tagline of democratising finance for all - may have rocked hedge funds this year as "meme-stock" retail investors took leveraged bets against them on the Robinhood platform, but it failed to make waves at its own IPO.

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