Weekly View - Common prosperity
It was a rollercoaster of a week in both news and markets, turning investors risk off across asset classes. Equities and commodities sold off as US 10y Treasuries gained. The USD also continued to appreciate. With reporting season behind us, investors have turned their attention to the ongoing spread of the covid Delta variant as the longer-term efficacy of vaccines is being called into question (although we urge caution when interpreting any statistics). Weak US retail and Chinese growth data further dampened the market mood as did rising geopolitical risks. Indeed, President Biden’s Afghanistan exit strategy could weigh on his party’s midterm election hopes along with voter perceptions around Ukraine and Taiwan. Meanwhile, covid-related supply chain problems continue as south-east Asian countries struggle to contain Delta amidst relatively low vaccination rates. Several global car makers have reduced production for this year as a result and container freight costs are nearly six times higher than the average rate across the decade before covid hit.
“Common prosperity for all” is the Chinese Communist Party’s new priority, with the President Xi Jinping implying a distribution of wealth component to its social goals. Global luxury stocks, which have been richly valued, tumbled last week. With FTSE Russell including Chinese government bonds in its World Government Bond index from October of this year, we are positive on Chinese sovereign bonds and prefer emerging-market corporate hard-currency debt over developed-market corporate debt. Elsewhere in the world’s second largest economy, troubled asset manager Huarong was ultimately rescued but not before damage was done, confirming that not all Chinese state-owned enterprises are equal and active management is key.
Interesting fact: earlier this month, the S&P 500 reached a new all-time high and doubled its value from the pandemic bottom of 23 March 2020. These highs could be behind the current low volatility level in markets. In the week ahead, there is some nervous anticipation around Federal Reserve Chair Jerome Powell’s speech at Jackson Hole. Markets doubt that the Fed will really tighten its monetary policy. We expect increased volatility in all asset classes going forward. For now, US Treasury and credit yields remain low and falling default rates, improving fundamentals and easy credit conditions have kept spreads tight. However, spreads will be key to watch in the coming weeks as an indication of whether markets start to price in a significant slowdown.