Market Commentary – August 2021

Bank of England’s party line continues

The Bank of England’s (BoE) Monetary Policy Committee meeting on the 4th August saw the agreement to keep the current stance on maintaining interest rates well and truly firm, with a unanimous vote that they remain unchanged at 0.1%. 

Although the Committee suggested they may raise interest rates later in the year, due to anticipation of the further rise in inflation – a predicted 4% in Q3 of the Consumer Prices Index (CPI) – already above the 2% target, the party line is still that inflation is expected to be temporary and transitory.

Minimum impact on the markets

Despite the suggestion of an interest rate rise in the medium term, the markets were relatively steady as the BoE maintained its support with their current level of government bond buying, with no plans to veer from it, due to the steadfast intention to keep interest rates low for house buyers and business borrowers. 

Assuming the return back to ‘normal’

From what has been a strong trajectory of economic recovery for the UK from the effects of the pandemic, the BoE’s latest assessment is that the recovery will continue, but growth will begin to slow throughout the second half of the year. The outlook remains positive however, of the ‘recovery’, with “confident spending” and a return to pre-pandemic levels of everything from growth to employment.

Recovery due to consumer spending and construction

There’s no doubt that consumer spending signalled the emergence from lockdown and helped the UK’s economy grow at 4.8% – the biggest contributions being from retail and hospitality. Construction output has also recorded strong growth, effectively marking the sector as back to pre-pandemic levels. Manufacturing growth was more muted however, but still recorded a modest 0.5% increase. 

Acknowledging the potential threats to UK recovery

It’s important to note, that overall GDP still remains 4.4% below its pre-pandemic level. The resurgence of Covid-19 infections in July means GDP growth may slow still in Q3 but the UK is currently the fastest growing major western economy and is on track to return to pre-Covid economic output later this year. 

But there are those who argue predictions of a ‘return to normal’ do not take into account many other factors from outside the country, not least the growing global threat of Delta variant cases, lower vaccination rates in other countries, and increased supply chain disruption, notably by Toyota as they announced a 40% reduction in global production due to microchip shortage.

UK housebuilders record bumper sales

Despite the end of the stamp duty holiday in July this year, low interest rates and lockdown savings continued to generate a surge in demand from house buyers, with UK housebuilders recording bumper sales. Taylor Wimpey posted very strong profits for the first half of its financial year due to building a record number of homes in the six months to 4th July as average prices increased 6.5% to £327,000. The market has since seen a dip and is expected to slow further with stamp-duty holidaymakers now filtering from the market.

Signs US recovery is cooling off

The latest economic data for GDP growth in the second quarter for the US is 6.6.%, but the latest employment figures show how new unemployment claims are increasing for the first time in five weeks. 

A jolt of volatility went through the markets as the Federal Reserve showed an interest, at its July policy meeting, in easing the central bank’s stimulus programme, currently at $120bn a month via its asset purchasing. Jerome Powell, Chair of the Federal Reserve, said there are a “range of views” on when is the appropriate time to start tapering bond purchases, sending a ripple effect beyond the US as major indices across Europe turned red. 

The asset purchasing programme has been a key driver in assisting the growth of many equity markets from the depths of the pandemic since March 2020. News of its potential reduction fed through to the global indices with the S&P 500 dropping 1.4%, and FTSE 100 and Stoxx Europe 600 dropping around 2%. 

However, it was a positive month for US equities despite inflation remaining at a 20-year high, although that’s expected to slow soon. US CPI increased 0.5% in July, keeping the current rate at 5.4%. 

Eurozone inflation raises no alarm

Inflation in Europe passed the European Central Bank’s (ECB) 2% inflation target this month as it reached 2.2% in year-on-year figures, rising to its highest rate since October 2018. The increase was largely driven by energy prices, a contribution of 1.3% so the underlying pressures still remain muted. 

Despite the rise in inflation, there appears to be no concern that the ECB will change its policy on interest rates, probably due to the rise being in line with what was predicted: namely, that rises would be short term and seen as necessary to bringing the economy back to its pre-pandemic levels.

Eurozone GDP also saw a rise to 2% and employment increased to 0.5%, attributable to increased vaccination rates and easing of Covid restrictions.

Oil production increases to avoid further price rises

Oil prices demonstrated heightened volatility this month, with Brent Crude hitting $75 before falling back. Following the rapid rise in prices earlier in the year, the OPEC+ countries agreed to a slight increase in production to prevent any further price increases. And President Joe Biden called for yet more increases in production to avoid high oil prices limiting the global economic recovery. 

Investor worry due to Chinese gaming restrictions

The Chinese government’s crackdown on gaming for under-18s, siting corruption of youth via gaming addiction, limited their tech time to three hours a week, unsettling video gaming and social media company investors alike, seeing shares plunge.  

Asset ClassProxy1-Month3-Month6-Month1-Year
CashUT Cash/Money Market00.00%00.01%00.01%00.03%
Gilts FTSE Gilts All Stocks-00.82%03.22%03.07%-01.88%
UK Corporate BondsUT UK Fixed Interest00.80%06.15%09.17%03.66%
UK EquityUT UK Equities03.47%04.14%16.09%39.81%
European EquitiesMSCI Europe ex UK02.74%04.76%15.82%26.79%
US EquitiesS&P 50003.95%10.83%17.39%25.31%
Japanese EquitiesMSCI Japan04.13%04.35%01.97%17.35%
Emerging Markets EquitiesMSCI Emerging Markets03.67%-02.33%-01.42%16.39%
PropertyUT Property02.54%08.18%16.57%24.23%

Data Sourced from FE Analytics, and Bloomberg Finance LP.*The value of your investment can go up as well as down, you may get back less than you originally invested. Circumstances are subject to change. Performance from the past or yields quoted should not be considered as reliable indicators of returns. Thi