Stock Markets

Volatility dominated to cause the major indexes to close mixed. The S&P MidCap 400, the S&P 500 and the Nasdaq Composite Indexes broke out in new intraday highs on Thursday, with the small real estate sector within the S&P 500 surging but the financials underperforming the other sectoral averages, In what is widely deemed the last week of the summer vacation season, trading volumes were mostly subdued. Contributing to the end-of-week listlessness is the foreseen market closure on Monday in observance of Labor Day. Over the week, the investing sentiment was largely overshadowed by investors’ anticipation of the closely watched monthly payroll report released by the Labor Department. Although the news was expected to come way below expectations, the silver lining is that the Federal Reserve would be less likely to commence their tapering of asset purchases this year if the report is so disappointing. The negative and positive aspects contributed to the market’s mixed reaction and volatility for the week.

U.S. Economy

The release of the official August report on Friday indicated that a slowdown in unemployment gains was confirmed. Nonfarm payrolls, an indicator which was expected to gain by 750,000, grew only 235,000, disappointing for being far below consensus expectation. A bright spot in the report, however, is that the previous months’ gains were revised higher and the unemployment rate was adjusted lower to 5.2%, a new low during the pandemic era. Part of the poor payroll figures was due to the negative effect of the delta variant particularly with regard to hiring in the leisure and hospitality sectors. Analysts, however, noted that rather than lower demand, a more significant cause in the slump was due to reduced labor supply rather than lower demand.  This is evident from the weekly jobless claims released on Thursday which again dipped to their lowest level since March 2020, while average hourly earnings climbed by 0.6% in August, which is approximately double the forecasted figure.

• Recent economic data appears to indicate that a slowdown in economic growth may be more likely moving forward to the end of the year. This is not entirely negative news, and may even be appropriate since the economy has been surging for much of the year. Since the recovery period after the worst of the pandemic appears to have achieved the peak in U.S. GDP growth, a slowdown in that rate of growth is likely as the delta variant continues to fuel concerns that the recovery may be waning. This may be temporary, however, and economic growth may resume its upward trend next year.
•  While the slowdown projected in Friday’s August employment report was significantly against expectations, it does not signal a sustained change in the direction of the labor market or the overall economic recovery. However, it may result in a potential weakness in consumer spending for the third quarter of this year. The continued economic expansion, however, will continue to rely on a strengthening labor market. What has taken place is just a small glitch in the overall trend. As concerns for the delta variant come to an inevitable resolution, the opening up of the hospitality and leisure industries will create greater demand and the labor supply will return to the market in a big way to meet this demand, creating a solid backbone for the economic growth in the next year.

Metals and Mining

Coinciding with the miss in the U.S. labor market resulting from lower job creation in August, the gold market appears poised to move higher in the coming weeks. Some economists observe that, despite upward revisions in previous reports’ job numbers, this is not enough to offset the negative perception regarding the last report about the labor market performance. In reaction to this, the gold market responded with higher prices for precious metals overall as investors resorted to low-risk assets in a flight to safety. Gold prices gained 0.56% week-on-week, closing at $1,827.74 per ounce from last week’s $1,817.57. Gold futures went up almost 1% on Friday alone after the jobs report was made public. Silver went up 2.87%, closing at $24.72 per ounce from the earlier week’s $24.03. Platinum also climbed 1.41% to $1,026.76 from the previous $1,012.53 per ounce. Palladium bucked the trend, losing 0.11% to close at $2,420.25 per ounce on Friday compared to the previous Friday’s close of $2.423.00.

Compared to precious metals, the base metals were mixed in the past week’s trades. Copper began the week at $9,410.00 and rose to $9,431.00 per metric tonne for a gain of 0.22%. Zinc, previously at $3.002.00 per metric tonne, ended at $2,996,50, shaving 0.18% in value. Aluminum outperformed with a 2.93% price increase, closing at $2.727.00 this week from the earlier week’s close of $2.649.50 per metric tonne. Finally, tin saw a price depreciation of 1.62% this week, ending at $33,055.00 per metric tonne from the previous week’s close at $33,600.00.

Energy and Oil

This week was marked by constricting developments in the oil market, with an improving demand situation due to the post-pandemic expanding economy on the one hand, and a slowdown in the rate of recovery in the supply situation due to a natural disaster on the other. Hurricane Ida battered offshore platforms and flooded refineries as it trekked through much of Louisiana’s refining industry during the week, keeping oil prices elevated due to supply constraints. There remain 1.7 million barrels per day of offshore production still to come back on stream, and the flooding in the refineries is bound to significantly reduce U.S. crude and product stockpiles. These developments are likely to put upward pressure on oil prices. The situation is not likely to be alleviated despite the OPEC+ member states confirming their commitment to the 400,000 barrel-per-day increase until the end of 2021.

Natural Gas

In the U.S., the price of natural gas soared to its highest level since November 2018. U.S. gas prices surged to $4.73 per million British thermal units (MMBtu) when word spread that the latest reported gas storage build of the International Energy Agency (IEA) storage build came in at 20 billion cubic feet (BCf), a figure much lower than expected for the week ended August 27. This would create a likely squeeze on the supply of natural gas as the country faces strong demand for heating capacity in the coming winter months.

Due to the supply constraints, natural gas spot prices went up for most locations. During the past report week (August 25 to September 1), the Henry Hub spot price ascended from $4.01/MMBtu to $4.46/MMBtu. The September 2021 New York Mercantile Exchange (NYMEX) contract expired on Friday at $4.370/MMBtu, an increase of $0.47/MMBtu from the previous Wednesday. The October 2021 NYMEX contract price rose to $4.615/MMBtu, higher by $0.69/MMBtu from last Wednesday. The price of the 12-month strip averaging from October 2021 through September 2022 futures contract increased by $0.41/MMBtu to $4.066/MMBtu. 

World Markets

European shares moved sideways for the week in listless trading as investors sought to weigh the signs of slowing economic momentum. The pan-European STOXX Europe 600 Index closed the week flat while most major indexes were mixed. France’s CAC 40 Index was relatively unchanged, Italy’s FTSE MIB Index rose by 0.22%, and Germany’s Xetra DAX Index fell by 0.45%. Higher-than-expected eurozone inflation and negative commentary from certain European Central Bank policy formulators brought the core eurozone government bond yields higher. The ECB members called for a reduction in the purchase pace of the Pandemic Emergency Purchase Program, causing the rise in government bond yields. The core markets were mostly tracked by the peripheral eurozone and UK government bond markets.

 In Japan, a strong rally in the bourses was the main reaction to news of Prime Minister Yoshihide Suga’s resignation. The positive reaction was in light of the elimination of political uncertainty surrounding the tenuous situation in the country and raised expectations of increased economic stimulus. The stock market surge was also driven by the good news of Japan’s accelerating COVID-19 vaccination roll-out. The Nikkei 225 Index gained an impressive 5.38%. The broader TOPIX Index followed suit with a gain of 4.49%, during which it attained a 30-year high. The yield on the 10-year Japanese government bond rose from 0.02% at the end of the preceding week to 0.04% at the end of this week. Concerning currencies, the yen weakened marginally to JPY 109.98 from JPY 109.83 against the U.S. dollar in the week prior.

The Chinese stock market climbed on its second-straight week, with the Shanghai Composite Index rising 1.7%. The SCI outperformed the large-cap CSI 300 Index which rose by 0.3%. Listed Chinese companies registered strong earnings for the second quarter, posting a 36% annual increase in earnings per share. The strongest earnings growth was realized by companies in the upstream resources sectors, with the semiconductors and new energy vehicles sectors coming in second. Sectors that lagged included the consumer, pharmaceutical, and telecom companies. The net profits, reckoned on a two-year basis to adjust for the impacts of the pandemic, grew by 10% over the second quarter of 2019. The yield on the 10-year Chinese bond dropped by four basis points to end at 2.85%. In the currencies market, the renminbi rose in value to close at 6.451 against the U.S. dollar, or 0.5% higher.

The Week Ahead

The week ahead is shortened due to the labor day holiday, but important economic data scheduled for release during the week are consumer credit and the producer price index.

Key Topics to Watch

• Job openings in July
• Beige book
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Producer price index, August
• Wholesale inventories (revision), July

Markets Index Wrap Up

Stock Markets

Impressive stock market gains were garnered in the just-concluded trading week as investor sentiments rose on the news that full Food and Drug Administration (FDA) approval was granted to the Pfizer-BioNTech COVID-19 vaccine. This signaled the strong possibility that the economic recovery will continue unabated and that the worst of the pandemic is over. The broad-market S&P 500 Index and the large-cap Dow Jones Industrial Average were outperformed by the tech-heavy Nasdaq Composite index, and the Russell 2000 Index of small-cap stocks surged on strong gains. As crude oil prices rose 10% for the week, stocks in the energy sector jumped commensurately. Despite the strong price performance, volumes were generally very light, consistent with the seasonal variations. The week was not without its worries; an attack at the Kabul airport in Afghanistan that resulted in casualties in the midst of the U.S. military’s withdrawal from the country. Sentiments were also weighed down by speeches delivered by three regional Federal Reserve (Fed) presidents in support of a more expedient commencement of the tapering of the central bank’s bond purchases. The stock market will continue its alternate optimism-caution rotation in line with local and foreign developments.

U.S. Economy

The economic data released during the week was generally positive, with July’s existing home sales beating consensus expectations by rising 2% from June. This is a signal that more inventory became available on the housing market. New home sales are still down 27% from July 2020, but rose 1% from June. The weekly initial jobless claims remained near their lowest levels during the pandemic although this indicator did rise slightly. The steady labor market performance is indicative that despite the continued spread of the delta variant, the labor sector continues to strengthen. The revised estimate of second-quarter gross domestic product (GDP) growth by the U.S. Commerce Department saw the economy expand at a seasonally-adjusted annual rate of 6.6%, slightly higher compared to the initial estimate of 6.5%.

• Despite increasing anticipation for the Fed to start its winding down or tapering of bond purchases, interest rates continue to remain at historic lows. Even though unemployment has fallen and yields have not made significant progress through the summer, GDP has returned to and even exceeded pre-pandemic levels. Also coinciding with these developments are the rise in inflation together with rising wages and supply shortages. What is likely to take place is a combination of continued economic growth, the start of the Fed taper, and stickier inflation that may drive longer-term rates higher.
• Restrictions attributed to containing the spread of the delta variant have muted consumer spending at restaurants and retail establishments. Economic indicators over the past week suggest the emergence of spending fatigue. A modest 0.3% increase in spending was indicated by the July personal-spending report, a level significantly weaker than the corresponding June indicator as well as a deceleration over the 1.6% average for the last six months. The observation is consistent with last month’s weaker retail sales report and triggers worries concerning the sustainability of the economic recovery.

Metals and Mining

Investor worries are focused on the impending Fed tapering of bond purchases that will signal a tighter monetary policy. While this has not yet taken place, however, the continued inflationary pressures have gold spot prices gaining 2.05% over the past week, from a previous close of $1,781.11 to $1,817.57 per ounce. This development could lead gold prices to the $1,900 per ounce level by the end of 2021, according to the forecast published by the Bank of America last Thursday, August 26. While it may test this resistance level, it is more likely that gold prices may settle around $1,800 per ounce during the final quarter of this year. This may be the highwater mark for the yellow metal as prices hold steady at around $1,800 through the first semester of 2022. One bright note for gold is the growing inflation rate as gold provides a low-risk safe haven for investments, however, the increasingly tighter monetary stance of the Fed may cause gold to look unattractive for the moment.

Other precious metals saw price increases consistent with the gold surge. Silver outperformed the yellow metal, rising 4.34% from $23.03 to $24.03 per ounce over the past week. Platinum gained 1.55%, from $997.10 per ounce to $1,012.53. Palladium outperformed the other precious metals week-on-week, climbing 6.43% to $2,423.00 from its previous close at $2.276.57. Base metals also rose over the week. Copper ended at $9,410,00 per metric tonne, 4.13% higher than its previous week’s close at $9.037.00. Zinc rose 2.53% to $3.002.00 per metric tonne from $2.928.50. Aluminum prices surged by 4.04% from $2,546.50 to $2.649.50 per metric tonne, and tin ended at $33.600.00 from $32.237.00 per metric tonne for a gain of 4.23%.

Energy and Oil

The fundamentals this week remained largely as they were last week. Nevertheless, oil prices continue to ascend, posting significant gains. West Texas Intermediate (WTI) spot price increased to a shade below $69 per barrel while the global benchmark Brent rose above $72 per barrel. What triggered the increase was the blaze at the Ku-Maloob-Zaap offshore Mexico platform, for the moment reducing supply by some 400,000 barrels per day of crude in the market. Further, the forced evacuation of personnel from the production platforms in the Gulf of Mexico prior to the arrival of Tropical Storm Ida contributed to the supply disruption. These issues overshadowed COVID worries and physical market weakness. In the meantime, the supply side may be buttressed by offers from the Venezuelan state oil company PDVSA of 20 million barrels (MMBbls) of heavy crude for September lifetime. Prices range from $35 to $41 per barrel. Venezuela seeks to increase oil exports in light of July outflows totaling 520 thousand barrels per day (kbpd).

Natural Gas

India is making a bid to boost its liquid natural gas (LNG) potential with the commissioning of a 5 million tonnes per annum (mtpa) liquid natural gas (LNG) import terminal scheduled for next year. The terminal will be located in the western state of Gujarat, with private investor Swan Energy targeting completion by March. State companies IOC, Bharat Petroleum, and ONGC each have leased 1mtpa of Swan’s capacities per year.

For this report week (August 18 to August 25), natural gas spot prices rose at most locations. The Henry Hub spot price climbed from $3.86 per million British thermal units (MMBtu) at the beginning of the week to $4.01/MMBtu by the end of the week. The price of the September 2021 New York Mercantile Exchange (NYMEX) contract increased by $0.04 to $3.897/MMBtu pm August 25 from $3.852/MMBtu on August 18. The price of the 12-month strip averaging September 2021 to August 2022 futures contracts rose $0.04/MMBtu to $3.709/MMBtu

World Markets

In Europe, central banks’ accommodative policies continued to provide buying incentive. Shares rose as investor sentiments are buoyed by strong signs of continued economic growth, with higher vaccination rates dispelling pandemic worries of rising case counts. The STOXX Europe 600 Index gained 0.75%. The country-specific indexes followed the same trend; France’s CAC 40 Index gained 0.84%, Italy’s FTSE MIB Index rose 0.34%, and Germany’s Xetra Dax Index inched up 0.28%. The UK’s FTSE 100 Index increased by 0.85%. Meanwhile, the core and peripheral eurozone bond yields also gained ground this week, mirroring the developments in U.S Treasuries. The UK gilt yields also followed suit.

The Japanese bourse also gained ground over the week. The Nikkei 225 Index rose 2.31% and the broader TOPIX Index increased 2.01%, notwithstanding more negative news regarding the coronavirus situation. The yields on the Japanese government bond rose to 0.02% from 0.01% the week previous. The yen, on the other hand, fell to JPY 109.9 against the U.S. dollar, from its previous exchange rate of JPY 109.7. The COVID-19 state of emergency was extended to eight more prefectures, imposing restrictions until September 18. In most regions, infections are said to be spreading on an unprecedented scale, according to Prime Minister Yoshihide Suga. The country continues to speed up its vaccination roll-out, with 60% of the population expected to be fully vaccinated by the end of September.

In China, stocks continued their recovery from the lows encountered in late July. The Shanghai Composite Index climbed 2.8% and the large-cap CSI 300 Index rose 1.2%. The China Securities Regulatory Commission committed to cooperate with the U.S. SEC concerning the auditing of Chinese companies that trade in the U.S. bourses. This resolves a years-long dispute with the U.S. wherein China refused to provide full access to the financial data of Chinese Companies trading in the U.S. on the grounds of national security. In the bond market, the yield edged up two basis points on the 10-year central government bond, to 2.89%. In currencies, the renminbi gained slightly against the U.S. dollar, closing at 6.480.

The Week Ahead

Important economic reports scheduled for release in the coming week include Unit Labor Costs, Hourly Earnings, and Consumer Confidence.

Key Topics to Watch

• Pending home sales
• Case-Shiller home price index (year-over-year)
• Chicago PMI
• Consumer confidence index
• ADP employment report
• Markit manufacturing PMI (final)
• ISM manufacturing index
• Construction spending
• Motor vehicle sales (SAAR)
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Trade balance
• Productivity (revision)
• Unit labor costs (revision)
• Factory orders
• Core capital goods orders (revision)
• Nonfarm payrolls
• Unemployment rate
• Average hourly earnings
• Markit services PMI (final)
• ISM services index

Markets Index Wrap Up

Stock Markets

The S&P 500 reached a new record high of 4,480 on Monday, which is more than double its March 23^rd intraday low of 2,192. However, stocks pulled back for the rest of the week, with small-cap stocks lagging and the Russell 2000 Index briefly correcting, down by more than 10% from its recorded peak in March 2021. Among the S&P 500 listings, energy shares underperformed the other sectors while a wide range of health care counters lifted the index. Volumes were at their highest monthly level, signaling a retail trading rebound. Sentiments that weighed the market down during the week included signs of an emerging economic slowdown in China, prompting advice from the Securities and Exchange Commission for investors to exercise caution when taking positions in Chinese stocks due to disclosure issues and regulatory uncertainties. Also causing headwinds are signs that the Federal Reserve may soon adopt a policy of tapering in the central bank’s monthly asset purchases. Midweek, the Fed released the minutes of its latest policy meeting wherein several members signified that they expected tapering may begin by the year’s end. By the end of the week, however, such worries were dispelled by Dallas Federal Reserve President Robert Kaplan when he expressed favor in delaying the tapering should the effects of the delta variant further proliferate in the economy.

U.S. Economy

There were also concerns that indicators released during the week were showing signs of a slowing down of the anticipated economic recovery. On Tuesday, stocks fell after an announcement by the Commerce Department of a 1.1% retail sales slump in July, despite an upward revision in the June base figure. The decline was concentrated on auto sales, which dipped 3.9% due to negative reaction to high prices and automakers dealt with supply shortages of semiconductor chips and other components. However, due to an increase in industrial production by 0.9% in July, automakers moderated or canceled plans to shut down production lines. Home Depot fell short of its sales expectations, causing stock prices to correct sharply even as sales fell on furniture and online purchases. Restaurants and bars experienced a resurgence in sales, however, as this sector opened up further with the lifting of pandemic mandates. Signals were mixed in the housing sector with building permits rising higher than forecasted but July housing starts falling 7%, more than consensus expectations. Labor and building supply worries hampered builder sentiment, a measure of which fell to its lowest level over the past year.  

• The results of the last Federal Reserve meeting show that reducing bond purchases has increasingly gained favor among the Fed members. Thus, it is only to be expected that the Fed may begin to gradually firm up its plans for the tapering, the timeline of which may be expected to be announced during the September meeting. It is expected, however, that the Fed has learned from its prior experience in 2013 and would take care to be more communicative and transparent.
• The taper is not expected to become an event risk because it is likely to be better managed. It may, however, reduce the buffer against the disappointments over uncertainties concerning economic growth and policy over uncertainties concerning economic growth and policy adjustments. The relative tranquility in the markets in 2021 was partly due to the high level of monetary stimulus. With a gradual reduction in the amount of monetary accommodation, equities will likely experience a greater degree of short-term volatility and occasional pullbacks.
• The inevitability of the necessity to wind down Federal support becomes more evident as the economy moves farther away from crisis conditions. The recovery is well underway with unemployment at 5.4% and trending downward while GDP growth is on pace to exceed the growth of the past four decades Credit conditions are robust and inflation, though heating up, remains moderate. The prospects of moves towards further normalization are therefore reassuring, even if it may entail tapering policies.

Metals and Mining

A return of investors to gold is possible in light of the recent volatility in cryptocurrencies. Although bitcoin is seen as digital gold and a possible hedge against inflation, it does not have the longevity and security that gold has proven to have. Furthermore, a massive amount of speculative money is required to maintain a viable position in cryptocurrencies. Therefore, it is reasonable to expect that those who fled to bitcoin will eventually return to gold as inflation rises. Any decline in the price of gold should therefore be seen as a buying opportunity. Over the past week, gold moved sideways, marginally increasing by 0.08% from $1,779.75 to $1,781.11 per ounce. This exhibited the resiliency of the yellow metal at this price, since other precious metals succumbed to significant corrections. Silver lost 3.03%, closing at $23.03 from $23.75 per ounce. Platinum closed at $997.10 per ounce, 3.39% lower than the previous week’s $1,032.08. Palladium suffered the greatest weekly loss of 14.09%, closing at $2.276.57 per ounce from the previous week’s close at $2,649.96.

Base metal prices also underwent major corrections over the past trading week. Copper spot prices lost 5.57% of their value, ending the week at $9.037.00 per tonne from the previous week’s closing price of $9.570.00. Zinc fell 3.46% from $3.033.50 one week ago to $2,928.50 per tonne in this week’s close. Aluminum corrected by 2.06% to close at $2,546,50 per tonne at the close of the week from $2.600.00 last week. Finally, tin ended the week at $32.237.00 per tonne, a drop of 8.74% from the previous week’s close of $35,324.00.

Energy and Oil

The downward trend in oil prices continued over the past trading week, declining by 7% week-on-week. Concerns about the proliferation of covid variants and the continued strengthening of the U.S. dollar coincided with the Federal Reserve cutting its stimulus measures for the year. The ICE Brent fell below $66 per barrel on Friday while WTI prices fell to $63 per barrel. With respect to production, OPEC compliance in July stood at 109%. The OPEC’s Joint Technical Committee reported that July’s production quotas were down 3% from June, and OPEC members’ compliance likewise dropped to 116% due to Saudi Aramco’s rollback of its unilateral supply cut. In another part of the world, the Nord Stream-2 Gas Pipe, which is to bring Russian gas to Germany from along the Baltic Sea, is reported to be 99% complete, and is set to meet its construction deadline set for the end of August. The NS2 is likely to be brought onstream before the end of the year.

Natural Gas

For this report week (August 11 to August 18), natural gas prices lost ground in most locations. The Henry Hub spot prices declined from $4.07 per million British thermal units (MMBtu) at the start of the week to $3.86/MMBtu at the week’s end. The price of the September 2021 New York Mercantile Exchange (NYMEX) contract fell by $0.21, from the week-earlier price of $4.059/MMBtu to $3.852/MMBtu a week later. The price of the 12-month strip-averaging September 2021 through August 2022 futures contracts also fell by $0.15/MMBtu to $3.668/MMBtu.

World Markets

The stock market benchmarks indexes in Europe lost steam and succumbed to global worries regarding the spread of the coronavirus’ delta variant, the political upheaval in Afghanistan, and the economic slowdown in China. In the first two weeks of August, the STOXX Europe 600 Index reached a series of record highs, but finally declined 1.48% at the end of the past trading week. The country stock markets followed the trend, with France’s CAC 40 Index dropping 3.95%, Italy’s FTSE MIB dipping 2.78%, and Germany’s Xetra DAX Index sliding 1.14%. The core eurozone bond yields also declined in the past trading week due to investors fleeing to lower-risk assets. Compared with highs of -0.456% on Monday, Germany’s 10-year bund yield closed the week at around -0.495% on Friday. In the currencies market, the euro and the British pound both weakened against the greenback. The risk-off environment apparently benefitted the U.S. dollar,

In Japan, stocks plunged during the week as the Nikkei 225 Index dropped sharply by 3.45%, closing at its lowest level for the year. The broader TOPIX ended 3.03% lower, partly on news that Japanese automotive company Toyota Motor will cut production for September by 40% from its earlier plan. The announcement heightened concerns that the country’s economic recovery was not proceeding as anticipated. A sell-off followed in the shares of car manufacturers’ stocks and companies along its supply chain, including steel and rubber manufacturers. Also contributing to the negative sentiment was the government’s decision to extend the coronavirus state of emergency to September 12 over Tokyo and five other areas, also while expanding coverage of the state of emergency to seven other prefectures. Even with positive economic data releases that signaled Japan’s return to economic growth in the second quarter, market losses continued. The yield on the 10-year Japanese government bond descended to 0.01% while the yen remained unchanged at JPY 109.7 versus the U.S. dollar. Japan’s gross domestic product (GDP) grew in the second quarter of 2021 by 1.3% annualized, still ahead of consensus estimates – a positive sign since it follows a 3.7% contraction in the first quarter.

China’s stocks, like the rest of the world’s bourses, also suffered weakness in part due to Beijing’s regulatory pressures on companies in the technology sector. Investors feared that other sectors may soon follow, thus losing buying interest in the counters. After state media reported that the State Administration for Market Regulation was contemplating new regulations for liquor companies, the liquor stocks suffered a sell-off. Health care companies also dipped on fears that the profits gained by the industry are likely to be tempered by new regulations. During the past trading week, the Shanghai Composite Index pulled back by 2.5% and the CSI 300 Index of large-cap stocks gave up 3.6% of its value, ending at its lowest close since the end of July. Hong Kong’s Hang Seng Index fell into bear market territory, diving by 20% from its peak earlier in 2021. At the close of the past week, China and Hong Kong lost more than $560 billion in market value combined. The renminbi touched 6.5059 against the dollar, a three-week low for the currency. The yield on the 10-year government bond fell three basis points to close at 2.87%.

The Week Ahead

Among the important economic data to be released in the coming week are initial and continuing jobless claims as well as personal income and consumption.

Key Topics to Watch

• Markit manufacturing PMI (flash)
• Markit services PMI (flash)
• Existing home sales (SAAR)
• New home sales (SAAR)
• Durable goods orders
• Nondefense capital goods orders, excluding aircraft
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• GDP revision (SAAR)
• Personal income
• Consumer spending
• Core PCE price index
• Trade in goods, advance
• UMich consumer sentiment index (final)

Markets Index Wrap Up

Stock Markets

Investors generally discounted news of the continued spread of COVID-19 and its impact on future economic expansion. Equities climbed, with value stocks listed in the S&P 500 Index outperforming the growth stocks. Materials led other sectors in their advance, while energy stocks dipped on worries that oil producers may break ranks on the supply side and demand may be ill-affected by the continuing global coronavirus lockdowns. Information technology stocks also slumped due to the potential weakness in memory prices exerting downward pressure on the semiconductor and semiconductor-equipment industry. Much of the attention of players was on the latest inflation numbers from the Bureau of Labor Statistics, together with the release of other U.S. economic data announcements. The consumer price index (CPI)) rose by 0.5% in July, which is a drop from June’s 0.9% CPI growth; it is also the smallest monthly percentage growth rate registered since March. The gradual drop in the inflation rate appears to confirm the speculation that consumer price increase will only be temporary and will ease as the economy adjusts its supply chain bottlenecks caused by the pandemic. There is some concern, however, that the producer price index (PPI) grew by 1.0% sequentially for the second month in a row, which is higher than most economists anticipated.

U.S. Economy

The data released by the Bureau of Labor Statistics in the past week revealed a record high in job openings, higher than the number of unemployed. Nevertheless, more than 3 million people have exited the labor pool from the beginning of the coronavirus pandemic. It is expected that with the accelerated vaccine roll-out, the reopening of face-to-face classes, and the expiration of enhanced unemployment benefits in the fall, the labor-force participation rate will return to pre-pandemic levels and a return to full employment will be expedited by record job gains.

• The 2020 bear market and economic recession were triggered by a public health crisis that, unfortunately for analysts, does not have a precedent upon which to base a comparative study. The financial crisis brought about by the pandemic triggered speedier and bigger fiscal and monetary support compared to earlier recessions. The Fed promptly provided funding and liquidity to businesses and consumers alike, at the same time expanding its balance sheet over four months by more than $3 trillion. By comparison, during the global financial crisis of 2008, the Fed likewise added the same amount to its balance sheet, but over a four-year duration.
• During the time of the pandemic, almost $6 trillion of financial aid was released by the government. In the past week, the Senate passed the much-awaited bipartisan infrastructure bill. If the Democrat-led $3.5 billion reconciliation package, which is focused on human infrastructure spending, will push through as proposed, government expenditure will expand further and add to GDP growth. If the pattern set by the global financial crisis is any indication, increased government spending may drag economic growth down as it did during the early years of post-financial crisis economic recovery.  

Metals and Mining

Early in the week, gold prices plunged to a four-month low but recovered in the latter part of the week, ending at $1,779.75, 0.95% higher than its previous close at $1,763.03 per ounce. The volatility of gold prices was attributed to a stronger-than-expected U.S. jobs report and the investors’ rush to buy the dollar in reaction to the job report release. This is consistent with the inverse relationship that exists between the dollar and gold prices. When the dollar strengthens against other currencies, gold tends to recede because it becomes more expensive in other currencies, pushing demand down. The recovery from the early weakness showed the resiliency of the metal, as analysts attributed the sell-off to the buying of U.S. dollars and selling of gold in the Asian market in response to the strong U.S. payrolls for July. It is possible for gold to trend lower in the future, however, because a gradual increase is expected in U.S. 10-year real yields, the opportunity cost of holding gold, a non-yielding asset, increases. Investors would not forego interest earnings in high-yielding assets by continuing to hold onto gold, and so a sell-off is likely.

Although gold retained its positive gains, silver fell by 2.38% from its previous close of $24.33 per ounce to end the week at $23.75. Other metals still registered gains for the week. Platinum gained 4.93%, rising from $983.58 to $1.032.08 per ounce for the week. Palladium closed at $2,649.96 per ounce this week, up 0.80% from last week’s close at $2.628.80. Base metals did relatively well for the week. Copper closed up 1.08% at $9,570.00 per tonne from its earlier close at $9,468.00. Zinc likewise gained, moving up 1,68% from $2,983.50 per tonne to $3.033.50. Aluminum rose 0.85% from $2,578.00 to $2,600.00 per tonne. Finally, tin gained 1.65% to close the week at $35,324.00 per tonne from the previous week’s close at $34,750.00.

Energy and Oil

Crude prices performed remarkably well over the past week. Brent remained above the $70 per barrel support even as covid fears continue to rise in the U.S. and China. The rising crude prices were of sufficient concern for the U.S. such that President Joe Biden called on OPEC+ to drill more and increase production to arrest the further rise in oil prices. The IEA downgraded its demand forecast for the rest of 2021, aware that the economic recovery in Asia may not be as robust as previously expected. But other analysts foresee crude prices to continue their ascent, possible to average $80 per barrel by the fourth quarter of this year, optimistic that the impact of the Delta variant will be short-lived and the demand and supply well-balanced until the year’s end.

 Natural Gas

In this report week (August 4 to August 11), natural gas spot price movements were mixed and volatile. The Henry Hub spot price dropped from $4.12 per million British thermal units (MMBtu) to $4.07/MMBtu through the week. The price of the September 2021 New York Mercantile Exchange (NYMEX) contract lost $0.10, ending at $4.059/MMBtu from the previous $4.158/MMBtu. The price of the 12-month strip averaging September 2021 through August 2022 futures contracts dipped $0.04/MMBtu to $3.819/MMBtu

World Markets

Trading in European shares was robust and the indexes rose in response to investors’ optimism in the recovering economy. Overall, concerns about impending surges in the coronavirus Delta strain infections and the slowing economic response in Asia appear to have been discounted. The pan-European STOXX Europe 600 Index rose 1.25% for the week. Italy’s FTSE MIB Index surged 2.51%, the German Xetra DAX Index climbed 1.37%, and France’s CAC 40 Index ascended 1.16%. The UK’s FTSE 100 Index gained 1.34% on the back of strong corporate earnings and the decline of the British pound against the U.S. dollar. The tendency is for U.S. stocks to rise as the pound descends since many companies whose stocks are listed in the index are multinationals earning revenues in overseas markets.

The core eurozone bonds moved sideways, climbing midweek and dropping on signs that the European Central Bank may remain dovish in the short term. The peripheral eurozone bond yields mirrored the core eurozone bond movements but were slightly weaker. UK gilt yields were relatively unchanged, rising toward the week’s end on the emergence of strong second-quarter economic data. This drove speculations that the Bank of England may withdraw its stimulus sooner than expected.

The Japanese stock market charted modest gains through the trading week. The Nikkei 225 rose 0.56% while the broader TOPIX Index ended with a gain of 1.40%. Investors continued to shy away on prospects that Japan’s coronavirus situation may deteriorate further, thus magnifying economic risks as the government imposed tighter restrictions. The second-quarter economic growth data is expected to be released soon, highlighting expectations that Japan is likely to have avoided a contraction due to its slow vaccination drive. The yield on the 10-year Japanese government bond climbed to 0.02% as the yield remained unchanged at JPY 110.29 against the U.S. dollar.

In China, stocks gained modestly even as worries continued to prevail regarding the government’s increasing oversight. The government’s regulatory pressure over the country’s technology and private education industries are feared to likely spread over the other sectors. The large-cap CSI 300 Index gained 0.5% for the week, while the benchmark Shanghai Composite Index rose by 1.7%. The yield on the 10-year government bond increased 6 basis points to 2.90% in China’s bond market. The renminbi remained unchanged versus the U.S. dollar. The official trade-weighted currency index was close to a five-year high. The index measures the renminbi’s value relative to a basket of foreign currencies.

The Week Ahead

Among the important economic data to expect this week are Housing Starts, Retail Sales Growth, and the Leading Indicators Index.

Key Topics to Watch

• Empire State manufacturing index
• Retail sales
• Retail sales ex-autos
• Industrial production
• Capacity utilization
• Business inventories
• NAHB home builders’ index
• Building permits (SAAR)
• Housing starts (SAAR)
• FOMC minutes
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Philadelphia Fed manufacturing index
• Index of leading economic indicators

Markets Index Wrap Up

Stock Markets

Equities charted gains for the past week as the large-cap benchmarks and tech-heavy Nasdaq Composite Index surged to record highs. A steep increase in the longer-term interest rates after the strong monthly payrolls report last Friday bodes well for the lending margins of banks, thus propping up the financial sector. Also moving up are the prices of small utilities stocks, although the energy sector underperformed in the S&P 500 Index. Trading slumped at the start of the week, possibly due to worries of the delta variant and discounting of earnings reports. Business segments that are central to the reopening of the global economy – airlines and travel, entertainment companies, big retailers, cosmetics companies, payment processors, and industrial metal manufacturers – showed particular weakness. Sentiments were also weighed down by China’s enhanced regulatory measures. The latter days saw the market energized by some unexpected earnings reports, with second-quarter earnings for the S&P 500 counters possibly increasing by over 85% year-on-year.

U.S. Economy

The closely watched monthly payrolls report issued by the Labor Department gave reason for optimism as the payrolls grew more than consensus expectations. There were 943,000 new jobs added in June, the effect of easing of lockdowns in the summer of 2020. April and May’s increases underwent an upward adjustment; the labor participation rate and average weekly hours rose, and the average hourly earnings growth (4%) increased higher than initially forecasted (3.8%). The unemployment rate fell to 5.4%, its lowest since the pandemic. Overall, the jobs report was reflective of the fundamentally favorable underlying economy.

• In the first two quarters of 2021, GDP growth averaged 6.4%, buoyed by a significant improvement in the labor market. The optimistic jobs report released during the week fuels optimism in the build-up of economic momentum and that it will be sustained for the rest of the year as a result of a recovering employment situation. The possibility of increasing inflation pressures should not be surprising as a result of fast-rising wages, which may prompt concerns about implications for Federal stimulus. The likelihood of policy changes may be tempered by the delta variant’s impact on the reopening of the economy and its possible effect on the pace of GDP growth.
• It is unlikely that the delta variant will derail the wider expansion of the economy even if its pace of growth may be disrupted. The projected GDP growth for the year remains between 6% and 7% and may experience a slightly slower (but still above-trend) growth rate for next year. As a result, corporate earnings growth can be expected to have a resilient foundation and drive the market moving forward. More than 80% of the S&P 500 have already reported second-quarter earnings for this year, registering 101% higher on a year-on-year basis. The 2021 S&P 500 earnings are forecasted to exceed their pre-pandemic level by 31%, and presently the index is already higher by 30% compared to the 2019 year-end level. This indicates that equities continue to remain linked to the economic fundamentals. It is therefore plausible that and volatility linked to the pandemic or tapering may be seen as opportunities for portfolio-rebalancing.

Metals and Mining

During the past week, the gold spot price descended by 2.82%, closing at $1,763.03 per ounce from the earlier week’s close of $1,814.19. Earlier in the week, the metal ticked upwards to $1,816.08 as a result of U.S. 10-year Treasury yields falling to a neat two-week low and the dollar index correcting 0.1% against its rivals. Since the price of gold has a resistance level at $1,830, its recent strength appears to have triggered some profit-taking and prompting the subsequent fall in price. Towards the end of the week, however, gold’s price broke down significantly due to trading off-balance when U.S. Treasury yields suddenly surged higher from their previous lows. The 10-year yields jumped 7 basis points within one hour after the Fed Vice Chair announced that a 2023 rate hike is consistent with the central bank’s new framework. Gold investors, who were then buying up the metal on risk-off trades, were whipsawed as sovereign yields sent bond prices heading sharply upwards. The gold sell-off was investors’ reaction to the aversion to shouldering the opportunity cost of holding gold when interest-bearing instruments are moving higher.  

The price of other precious metals followed the direction of gold’s descent. Silver’s drop exceeded by proportion that of gold, losing 4.55% of its value when it closed at $24.33 per ounce from the previous week’s close of $25.49. Platinum descended even further, dropping 6.46% from last week’s close of $1,051.55 to Friday’s close of $983.58 per ounce. Palladium also gave up 1.28%, the least price drop by proportion, ending at $2,628.80 from the previous week’s close of $2.662.94 per ounce. Base metals also absorbed some contagion from the trend in precious metals. Copper lost 2.67%, dropping from $9,728.00 to $9,468.00 per tonne. Zinc gave up 1.44%, sliding from $3.027.00 to $2.983.50 per tonne for the week. Aluminum lost marginally by 0.46%, dipping to $2.578.00 from $2,590.00 per tonne. Tin bucked the trend, however, rising 0.29% from $34,649.00 to $34.750.00 per tonne.

Energy and Oil

Oil price recovered somewhat on Friday from the week’s collective decline; that being said, caution still dominates in the oil markets, mindful that China and the U.S., its two largest players, are still contending with the covid surges. Another component of the oil market’s geopolitical risk is added by tensions in the Persian Gulf, it was however offset by the hike in U.S. crude inventories during the week.

The future demand for fossil fuels appears to be further compromised by the plans put forward by Biden’s White House calling for half of cars and trucks in the U.S. to be comprised of electric vehicles (EV), plug-in hybrid electric vehicles (PHEV), or fuel cell vehicles by the end of the decade. The non-binding executive order notwithstanding, policies appear to be more aggressively headed towards greater fuel economy standards than they were previously. In the meantime, hopes for a more diplomacy-focused Biden administration to ease sanctions are prompting negotiations between the Venezuelan opposition and the Maduro-led government. Meanwhile, in another part of the world, Russia is contemplating a three-month ban export ban on gasoline. This is in reaction to the two-pronged dilemma of increasing domestic demand and lower refinery production due to prolonged maintenance.

 Natural Gas

The price of liquefied natural gas (LNG) ascended in Asia to an 8-week high as a result of higher-than-average temperatures driving greater demand for air-conditioning power. In Asia, spot LNG prices for the September delivery date rose to almost $17 per million British thermal units (MMBtu), amounting to nearly a $1.50/MMBtu increase from last week. In most locations for the recent report week (July 28 to August 4), natural gas spot prices climbed. The Henry Hub spot price went up from $4.05/MMBtu at the start of the week to $4.12/MMBtu at the week’s end. The August 2021 New York Mercantile Exchange (NYMEX) contract expired on August 4 at $4.044/MMBtu. The September 2021 NYMEX contract price rose to $4.158/MMBtu, an increase of $0.12/MMBtu week-on-week. The price of the 12-month strip averaging September 2021 through August 2022 futures contracts ascended by $0.10/MMBtu to $3.854/MMBtu.

World Markets

In Europe, equities surged due to strong corporate earnings growth and renewed prospects of a recovering economy. The pan-European STOXX Europe 600 Index closed 1.78% higher than the foregoing week. Major stock indexes also outperformed, with Germany’s Xetra DAX Index gaining 1.45%, Italy’s FTSE MIB Index rising 2.51%, and France’s CAC 40 Index advancing 3.09%. Likewise rising by 1.29% is UK’s FTSE 100 Index. The core eurozone bond yields have moved lower in reaction to the possible increase in coronavirus cases hampering the further enhancement of the continent’s recovery. Peripheral eurozone bond yields followed the core markets’ trend for the most part. The UK gilt yields slid in conjunction with the core markets. The correction in yields was subsequently moderated in response to hawkish pronouncements by the Bank of England (BoE) that modest tightening of monetary policy is still possible. The outlook, however, is for the economy to continue to grow 7.25% this year, and for the GDP to increase next year by 6% rather than the previously forecasted 5.75%.

Japan’s stock markets overperformed in the past week. The Nikkei 225 rose 1.97% while the broader TOPIX Index climbed 1.49%, driven by the listed firms’ positive earnings reports. The optimism was somewhat dampened by the rise in coronavirus cases in the country, topping 5,000 for the first time. An advisory panel of experts cautioned the country may face a further deterioration of the situation. Cases across the nation already reached the highest level on record, prompting the government to expand its quasi-state of emergency to eight additional prefectures where the highly contagious delta variant is expected to be spreading. Based on this outlook, the yen remained unchanged, ending the week at JPY 109.7 to the USD. The yield on the 10-year Japanese government bond dropped modestly to 0.01%.

In China, stocks climbed to recover some of the ground lost in the previous week’s sharp declines. Buyers went bargain hunting, pulling the Shanghai Composite Index up by 1.8% and the large-cap CSI 300 Index by 2.3%. Domestic investors were still careful to sidestep market sectors that came under the watchful eye of the government and instead went for stocks that enjoyed strong official support. Negative comments by the state media regarding online gaming dampened investor sentiment, giving the impression that the industry may come under tighter government regulation. Following positive profit alerts and share buyback announcements in several property companies, investors took advantage of the opportunity to take profits in these areas. In the country’s bond markets, yields achieved some stability following the previous week’s descent. The yield on the 10-year government bond fell two basis points to close the week at 2.83%. Foreign investors weighed in more heavily on Chinese government and policy bank bonds in July, despite a slowdown in the pace of inflows since January. Expectations were reinforced that the central bank will remain supportive in its liquidity policies, based on a dovish quarterly meeting of the country’s 25-member Politburo on July 30    

The Week Ahead

Among the important data scheduled for release in the coming week are Productivity, Unit Labor Costs, and Inflation.

Key Topics to Watch

• Job openings
• NFIB small-business index
• Productivity (preliminary)
• Unit labor costs (preliminary)
• Consumer price index
• Core CPI
• Federal budget balance
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Producer price index
• Import price index
• UMich consumer sentiment index (early)

Markets Index Wrap Up

Stock Markets

The past trading week saw indexes mixed with a high level of volatility. The large-cap benchmark indexes as well as the technology-heavy Nasdaq Composite index saw record highs midweek before the slump towards Friday’s close where they settled with moderate losses. Appearing to buck this trend are the S&P 400 Index for MidCap stocks and the small-cap Russell 2000 Index, both of which broke out of the past weeks’ underperformance to chalk up weekly gains. Utility shares, which likewise underperformed in the recent past exhibited a change in course and landed among the better listings, together with real estate and materials stocks, in the S&P 500 Index.

The consumer discretionary sector was pulled down by the decline in Amazon.com on news that broke out on Thursday evening. Reports revealed that the online retail business failed to achieve its expected second-quarter revenue forecast. With 177 of the S&P 500 companies expected to report their second-quarter results, the trading week just concluded proved to be the busiest week of the earnings report season, spanning over two months. Although earnings reports drove most of the activity in the market, particularly with respect to technology and internet-related large corporations, macroeconomic concerns were also closely monitored by investors. News of the spread of the delta variant of the coronavirus continued to send jitters among players, causing the S&P 500 to end lower for the first time in six trading sessions. Sentiments perked up with the announcement by the Center for Disease Control and Prevention recommending that masks were again to be worn by vaccinated persons indoors and in higher-transmission areas. Further positive news was released that the senate was favorably considering a bipartisan USD 1 trillion infrastructure proposal.

U.S. Economy

The second-quarter GDP initial estimate indicates that the U.S economy has returned to its pre-pandemic peak and resumed its growth from the first quarter, although at a much slower rate than initially expected. Compared to the 8.4% forecast, the real GDP growth rate was measured at a 6.5% annualized rate. The slowdown is attributable to a wider trade deficit with imports rising faster than exports, as well as a reduction in inventories, residential (housing) investment, and government spending.

• The lower-than-expected GDP announcement notwithstanding, consumer spending, which makes up the greater part (about 70%) of overall demand, recorded stronger than forecasted growth at 11.8%. This was largely due to the reopening of the economy coinciding with the vaccination roll-out, pent-up demand, and consumer savings during the pandemic. Holding back stronger economic growth were supply shortages and bottlenecks that dampened what would have been stronger demand. One of the supply issues impacting the economy was the incidence of empty car-dealer lots. A positive development from this situation that would likely boost the GDP would be the impending restocking of inventories in the second semester of this year.
• Economic activity is back to its 2019 peak after only six quarters and record-setting monetary and fiscal support. The recovery was one of the shortest in U.S. history, from one of the deepest recessions it had ever experienced. The pace of economic growth is expected to slow down for the second half of the year during which time the country moves from economic recovery to expansion. In the next year and a half, the economy may be expected to resume a 2.3% growth rate or better, which characterized its pace over the decade from 2010 to 2019.

Metals and Mining

The spot price of gold firmed up as the dollar softened and U.S real yields fell during the just-concluded trading week. Its week-on-week gain was 0.67%, closing at $1.814.19 per ounce this week over last week’s $1,802.15. Investor caution tempered the gains in the gold price in front of the Federal Reserve meeting that may give further indications of stimulus tapering. The yield on 10-year Treasury inflation-protected securities (TIPS) descended to record lows, reducing the opportunity cost for investors holding gold. In recent weeks, after touching the $1,830 resistance level, gold had been constrained to a tight trading range, thus failing to make the most of sideways movement in U.S. benchmark Treasury yields.

A possible incentive for activity in precious metals will hinge on how the Fed balances possible accelerated inflation increase with the economic threat of a more infectious Delta coronavirus variant. The imposition of hawkish policies by the central bank may create headwinds for gold, which has a zero yield. A more accommodative stance, on the other hand, may enhance interest in gold that may send its price upward. For the week, silver followed the trend of gold, gaining 1.23% to close at $25.49 per ounce from the previous week’s close of $25.18. Platinum and palladium fell slightly, however. Platinum lost 1.13% to close at $1,015.55 per ounce from $1.063.54, and palladium lost 0.51% to close at $2,662.94 per ounce from $2,676.62 the week earlier.

Base metals were mixed in trading this week. Copper gained 2.23% to close at $9,728.00 per tonne from $2.516.00. Zinc showed strong gains, closing at $3.027.00 per tonne from $2.502.00 for a week’s gain of 20.96%. Aluminum closed at $2,590.00 per tonne from $2.963.00 for a loss of 12.59%. Finally, tin increased 43% to close at $34.649.00 per tonne from the earlier week’s $34,500.00 closing price.

Energy and Oil

Commercial stocks of oil fell to their lowest since January 2020, creating strong support for crude prices and signaling that U.S. inventory dynamics will likely see indications of further tightening in oil supply. The markets have quieted down on any expectations of Iranian oil destabilization as the new president-elect is sworn to office in the coming week, allaying fears that Tehran may release incremental barrels to flood the market. Worries about further coronavirus uncertainties continue to persist in light of the rising Delta cases in several European countries.

Elsewhere in the world, ADNOC, the UAE state oil company, notified its term buyers that it shall ease its export nomination cuts for October 2021, bringing back 10 percentage points worth of output relative to September. This is a sign that the Emirates remains sincere in its drive to ramp up production. In Indonesia, net carbon neutrality was set to be achieved by 2060 or earlier, to ensure its greenhouse gas emissions peak by the end of this decade. Oil shall be phased out the swiftest in this scenario, leaving abundant coal to retain its predominance in power generation until mid-century.

Natural Gas

Amidst exorbitantly higher liquid natural gas (LNG) prices and limited availability of pipeline supplies, the European countries struggle to replenish their gas reserves as the EU failed to replenish its gas storage. Total EU gas reserves are at their lowest level since 2015, a mere 616 TWh, which is equivalent to about 63 billion cubic meters. Natural gas spot price movements for the report week July 21 to July 28 were mixed, with Henry Hub spot price rising from $3.91 per million British thermal units (MMBtu) at the start of the week to $4.05/MMBtu by the week’s end. The August 2021 New York Mercantile Exchange (NYMEX) contract expired at $4.044/MMBtu, higher by $0.08/MMBtu from the earlier week’s price. It remained above $4.00/MMBtu for the fourth time this month. The September 2021 NYMEX contract price rose to $3.967/MMBtu, higher by $0.03/MMBtu week-on-week. The price of the 12-month strip averaging September 2021 through August 2022 futures contracts ascended to $3.685/MMBtu, increasing by $0.06/MMBtu.

World Markets

In Europe, the stock market moved sideways as positive investor sentiment for strong corporate earnings were met with concerns about the proliferation of the Covid Delta variant. Volatility in the market also resulted from a regulatory crackdown by Chinese authorities on European technology and education companies, somewhat undermining investor confidence. The pan-European STOXX Europe 600 Index remained unchanged while major indexes were mixed. Italy’s FTSE MIB Index gained 0.95%, France’s CAC 40 Index increased by 0.67%, and Germany’s Xetra DAX Index slid 0.80%. The UK’s FTSE 100 Index also remained flat. Eurobond yields lost ground on concerns regarding the coronavirus variant spread as well as worries about the broader economy and reflation expectations. Core markets performance reflected on peripheral market yields, dipping after the European Central Bank (ECB) hinted that inflation may overshoot its target of 2%, albeit transitorily. UK gilt likewise mirrored the yields in other core markets.

In Japan, the benchmark stock indexes faced strong resistance as the coronavirus cases attained a record high. The government extended its state of emergency proclamation to stave the spread of the virus. The Nikkei 225 Index fell 0.96% while the broader TOPIX Index also gave up 0.17%. The trading week was shortened due to the four-day weekend devoted to the start of the Tokyo Olympics. The 10-year Japanese government bond yield inched up to 0.020% as the yen gained strength against the dollar to end the week at JPY 109.6 to USD1. Regarding China’s equity bourses, stocks fell after a regulatory overhaul of the for-profit sector revealed on July 24 turned out to be much more difficult to meet than originally expected by investors. This triggered worries that enhanced government oversight would spread into Chinese technology, property, and health care stocks. In its largest weekly loss since February, the large-cap CSI 300 Index plunged 5.5%, causing the benchmark to lose 7.9% for July. This is the stock market’s biggest monthly loss going back to October 2018. Hong Kong’s Hang Seng Index declined 1.4% week-on-week after the benchmark lost more than 8.0% on Monday and Tuesday with volumes in their record highs.  

The Week Ahead

In the coming week, important economic data expected to be released include consumer credit, construction spending, and hourly wage growth.

Key Topics to Watch

• Markit manufacturing PMI (final)
• ISM manufacturing index
• Construction spending
• Factory orders
• Motor vehicle sales
• ADP employment report
• Markit services PMI (final)
• ISM services index
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Trade deficit
• Nonfarm payrolls
• Unemployment rate
• Average hourly earnings
• Wholesale inventories
• Consumer credit

Markets Index Wrap Up

Stock Markets

Although the stock market suffered a deep sell-off registering as a 700-point drop in the Dow on Monday, it rebounded on Tuesday and the rest of the week to end higher than last week’s close. The rally was concentrated mostly in the technology and internet-related companies known as the FANG+ stocks, referring to 10 of today’s highly-traded tech giants. Growth stocks comparatively outperformed value stocks for five weeks in a row, cumulatively establishing a significant year-to-date lead. Trading volumes were narrow; the number of shares transacted on Thursday was at a level second to the lowest on record for the year. The plunge at the start of the week was attributed by many to renewed fears of the coronavirus Delta variant. There was a surge in cases and hospitalizations in various parts of the United States as well as other parts of the world. Shares of companies in industries linked to the economic recovery, such as airlines and cruise operators, performed poorly as a result. Energy stocks likewise suffered as oil prices suffered their heftiest losses since April 2020 following a deal struck by OPEC and other large oil exporters to increase output. For the rest of the week, the major benchmarks recovered nearly all their losses due to positive news on the housing sector.

U.S. Economy

The principal mover of the economy still appears to be the uncertainties related to the spread of the COVID-19 and its variants. Also weighing on the anticipated recovery is the market’s expectation for the possible shift in Fed stimulus and the high bar that has been set for the expectation of economic growth. These factors appear to increase the probability that a more dramatic stock market pullback may materialize towards the end of the current year.

• While the delta variant remains the apparent cause, much of the volatility in the markets may be attributed to the growing likelihood of inflationary pressures and the gnawing suspicion that the markets may have reached their peaks. The GDP growth rate for 2021, determined to approach almost 7%, may be the strongest reading in the economic expansion into the future, as the maturing economy is likely to usher in a more moderate growth rate.
• While the foregoing may be a possibility, it is however more plausible that the market will continue its long-term growth with its underlying health intact. Despite inflationary concerns, the Fed continues to keep its accommodative policies. It is expected that despite the winding down of its bond-buying stimulus, monetary policies implemented by the Fed will remain historically positive for a longer time. The economy is expected to grow at a faster-than-average rate, and GDP will continue to expand through 2022. Corporate profits continue to grow, which will drive long-term market viability. Double-digit earnings growth is expected for this year and the next due to the deep base created as a result of the COVID-19 lockdowns. Therefore, despite a possible pull-back in the markets, the economy still appears to be on a stable footing.

 Metals and Mining

The gold spot price has suffered a slight correction week-on-week as investors returned to risky instruments with the strengthening of the dollar and increase in yields. This week, gold ended 0.55% lower than the previous week, closing at $1,802.15 per ounce compared to the prior weekly close of $1,812.05. The price of bullion suffered a devaluation after it moved tentatively to the last month’s peak, With the concerns of the threat posed by the Delta variant subsiding, investors have regained their confidence in risky assets and moved out of safe-haven vehicles like gold. The increase in the benchmark Treasury yields tends to draw investor interest away from gold since investments in commodities, such as precious metals, pays no interest. Instead, it converts to an increased opportunity cost as a result of holding the commodity.

Other major precious metals followed suit with the trend of gold prices. The spot price for silver lost 1.87% of its value week-on-week, closing this past week at $25.18 per ounce over last week’s close of $25.66. Platinum also gave up 3.74% of its value, from last week’s close of $1,104.91 per ounce to this week’s close of $1,063,54 per ounce. Palladium appeared to buck the trend for precious metals, however. The metal gained 1.74% for the week, beginning at $2,630.83 per ounce and closing last Friday at $2,676.62. Base metals were mixed for the week. Copper rose marginally by 0.31%, ending at $9,516.00 per tonne from the previous close of $9,486.50. It outperformed zinc which shed 15.70% of its value, closing for the week at $2.502.50 per tonne from the earlier close last week of $2,968.50. The other base metals performed better, with tin closing up higher by 4.14%, from $33,130.00 per tonne to $34,500.00. Aluminum posted a significant gain of 17.67% for the week, from its previous closing price of $2,518.00 per tonne, to $2,963.00 in last Friday’s close.  

Energy and Oil

A major plunge in oil prices in the just-concluded week resulted from the news of OPEC+ returning to its previously withheld production in August 2021. The oil price cartel followed through with 400,000 barrels per day (bpd) increments until the end of 2021. The latter half of the week nevertheless saw a strong rebound in the price of oil when market players came to realize that the additional OPEC+ supply will be sufficiently absorbed by the recovering worldwide demand for oil. The strong recovery also indicated that the market may have discounted the risk of the spread of the COVID-19 Delta variant through the U.S. and Southeast Asia.   

Natural Gas

The price of U.S. natural gas futures hit its highest level in nearly three years, since December 2018, in light of the warmer-than-expected weather and the higher demand for air conditioning power. This caused the Henry Hub spot price to rise from $3.75 per million British thermal units (MMBtu) on July 14, to $3.91/MMBtu on July 21, the duration of this report week. The price of the August 2021 New York Mercantile Exchange (NYMEX) contract gained $0.30, rising from $3.660/MMBtu to $3.959/MMBtu. The price of the 12-month strip, averaging August 2021 through July 2022 futures contracts, also rose $0.22/MMBtu to $3.693/MMBtu.

World Markets

European shares climbed on positive investor sentiment concerning the anticipated corporate earnings season and the reaffirmation by the European Central Bank (ECB) that it would continue to adopt accommodative monetary policies. The favorable factors worked to reverse early softness in the market growing out of concerns for the spread of the Delta variant and its impact in slowing down the global economic recovery. The pan-European STOXX Europe 600 Index closed 1.49% higher than its ending price of the previous week. Also increasing in value are the main European stock indexes. France’s CAC 40 Index climbed 1.68%, Italy’s FTSE MIB Index rose 1.34%, and Germany’s Xetra DAX Index gained 0.83%. The UK’s FTSE 100 Index also grew by 0.28%. As expected, core eurozone bond yields fell in reaction to the strong equities market. Fears surrounding the spread of the coronavirus pandemic and reiteration by the ECB of its view that the inflationary push is only transient caused a shift to high-quality government bonds. The peripheral eurozone bond yields followed the trend set by core markets. The UK gild yields were volatile as they reacted to reports of surging coronavirus cases by midweek.

The equities markets in Japan lost ground on Wednesday in advance of an extended weekend before the commencement of the Tokyo Olympics. The Nikkei 225 Index plunged 1.63% while the broader TOPIX Index corrected 1.44%. The weakness in the markets is partly due to concerns that the Olympic games may further worsen the COVID-19 spread in the country and negatively impact the progress of the ongoing economic recovery. Since Prime Minister Yoshihide Suga took office in September 2020, support for its cabinet was reported to have slid to its lowest level this past week. The yield on the 10-year Japanese government bond declined to 0.016% and the yen’s value slightly lost ground to JPY 110.45 versus the U.S. dollar.

Chinese stocks ended the week mixed, with the Shanghai Composite Index rising 0.3%, outperforming the large-cap CSI 300 Index that declined by 0.1%. The People’s Bank of China pegged loan rates to their current levels for one- and five-year maturities. While monitoring pressures on leveraged borrowers such as property developers, the central bank is expected to continue to ensure stable credit flows to state-owned enterprises, companies, and consumers. The yield on the 10-year sovereign bond lost 4 basis points to close the week at 2.93%, causing bond yields to also move lower. The renminbi climbed 0.2% to end at 6.47 versus the U.S. dollar. It is likely that China’s net long-term capital inflows and stable current account surplus will provide the needed support for the currency in the near future.

The Week Ahead

Included among the important economic data to be released in the coming week are Personal Consumption, Personal Income, and Pending Home Sales.

Key Topics to Watch

• New home sales (SAAR)
• Durable goods orders
• Nondefense capital goods orders, excluding aircraft
• S&P Case-Schiller home price index
• Consumer confidence index
• Housing vacancies
• Advance trade in goods
• Federal Open Market Committee announcement
• Fed Chair Jerome Powell press conference
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Gross domestic product, first estimate (SAAR)
• Pending home sales index
• Employment cost index
• Personal income
• Consumer spending
• Core inflation
• Chicago PMI
• UMich consumer sentiment index (final)

Markets Index Wrap Up

Stock Markets

The major indexes closed at lower levels, although the S&P 500 and Nasdaq Composite touched new intraday highs within the week before ending with a correction. Equities suffered some losses this week but the uptrend established from the beginning of 2021 remains intact. That being said, there appear to be signs that a reversal may be taking place in the second quarter from the first quarter, suggesting that investors should take a more cautious approach. For one, the 10-year yields have returned to pre-pandemic levels, suggesting that asset class performance and market-based inflation expectations have reversed in this second quarter. Furthermore, the rally for value investments, cyclical sectors and small-cap stocks have lost momentum. Central banks have also resumed deliberating about possible shifts in policy. While the second-quarter earnings reporting season has begun, market activity is noticeably subdued.

U.S. Economy

Data released during the weak indicated that headline and core consumer prices (excluding food and energy) had increased by 0.9% in June, which is twice the approximate consensus estimates, causing a retreat in stock prices on Tuesday. The core rate grew 4.5% in the last 12 months, the fastest increase in this indicator since 1991. Responsible for nearly one-third of the increase is the surge in used-car prices; even so, inflationary pressures were perceived by consumers, with food prices increasing by 0.8% for the month, and gasoline prices rising by 2.5%. The New York Federal Reserve announced on Monday that year-ahead inflation expectations are now at the highest on record since 2013, at 4.8%. Concerns were somewhat allayed when Fed Chair Jerome Powell informed Congress that inflation pressures are temporary and there is still substantial progress expected on the Fed’s employment and inflation goals. The Fed is generally expected to taper asset purchases before raising short-term interest rates, a move that is intended to maintain downward pressure on long-term rates. Chicago Fed President Charles Evans cautioned on Thursday that tapering too early could undercut the Fed’s objectives.  

• Economic data released this week were mixed relative to expectations. A slight contraction in manufacturing output for June was attributed to difficulty among carmakers in finding chips for their production efforts. In contrast, in the New York region, an index of manufacturing activity touched a record high, indicating that there is strength in both new orders and shipments. Weekly jobless claims have reached a low for the pandemic period at 360,000, which is just in line with analysts’ expectations.
• The was a 0.6% increase in retails sales in June, outperforming consensus expectations of a decline by 0.4%. Without counting the auto sector which had been volatile due to the global chip shortage, sales increased by 1.3%. The effects of the reopening of the economy were evident in the Commerce Department data, with consumer purchases shifting from home goods towards leisure, restaurants, and apparel. Inflation worries continued to affect consumer sentiments as mirrored by the University of Michigan’s preliminary gauge of consumer perceptions. Consumer complaints concerning the surging prices of homes, vehicles and household durables have reached an all-time high, based on the survey conducted by the university.

Metals and Mining

The spot price of gold was up by 0.3% for most of the week, although it corrected slightly at the close of Friday’s trading. Price appreciated by 0.21% week-on-week, closing at $1,812.05 per ounce from last week’s $1,808.32 per ounce. The contraction on Friday is attributed to a stronger dollar, weighing the metal further from its one-month high in the previous session. Despite Friday’s sell-off, gold still ended up for the week. Further declines in the price of this precious metal appears to be limited, however, because of the improving physical demand for bullion particularly from China, a top global consumer, as well as central bank purchases. Gold saw a one-month high last Thursday after Federal Reserve Chair Jerome Powell reiterated the central bank policy to remain accommodative. This stance by the Fed may continue for some time while Delta variant cases continue to intermittently spike for an indefinite time.

In the market of other precious metals, palladium dropped 6.45% for the week, ending at $2,630.83 per ounce from last week’s $2,812.18 per ounce. Platinum, on the other hand, traded sideways, registering a marginal 0.2% gain to close at $1,104.91 per ounce from $1,104.67 per ounce.  This was Palladium’s first weekly decline in the last four weeks. Tepid trading in both was due to the reported decline in U.S. motor vehicle sales due to supply chain problems caused by a global semiconductor shortage. Both metals are used in the automotive manufacturing industry to limit emissions in engine exhaust systems. Meanwhile, silver slid by 1.69%, closing at $25.66 per ounce from last week’s $26.10 per ounce.

Base metals also ended mixed for the week. Copper lost 0.35% from last week’s close of $9,519.50 per tonne, ending Friday at $9,486.50 per tonne. Zinc also lost by 0.29%, closing the week at $2,968.50 from $2,977.00 per tonne. On the other hand, Aluminum gained 0.66%, from $2,501.50 to $2.518.00 per tonne. Tin outperformed the other metals for the week. The price of tin rose by 4.58%, closing at $33.130.00 per tonne on Friday from the previous week’s $31,680.00

Energy and Oil

A familiar path forward for the global oil markets became evident as a result of the baseline amendment agreement struck between Saudi Arabia and the UAE. The lack of particulars on exactly how OPEC+ members would bring back production levels still suggests much uncertainty. Amidst a peak driving season, lackluster demand from the US continues to cast doubts on the robustness of global gasoline demand. A return to pre-pandemic demand is foreseen by OPEC by 2022. Assuming effective containment of COVID-19, the annual average demand is expected to reach 99.86 million barrels per day, amounting to a 3.4% year-on-year growth.

The demand for fossil fuels will continue to grow as global electricity demand growth overtakes aggregate renewals capacity growth. The production of more fossil fuels will be necessary to match the accelerating needs, according to the International Energy Agency or IEA. The IEA forecasts that 2021 power consumption will rise by 5% year-on-year, and an increment of 4% in 2022. In the global arena, India seeks to entice investors in the upstream oil industry by reducing the number of regulatory approvals needed to launch an exploration project. The streamlined procedures will involve only 18 from what were formerly 37 approvals, in an attempt to resuscitate its upstream sector. India produces about 770,000 barrels per day of crude and is facing structural decline, with 80% reliance on oil imports.

Natural Gas

For this report week (July 7, Wednesday, to July 14, Wednesday), natural gas spot prices rose at most locations. The Henry Hub spot price increased to $3.75 per million British thermal units (MMBtu) from $3.60/MMBtu the previous week. The price of the August 2021 New York Mercantile Exchange (NYMEX) contract climbed by $0.06 to $3.660/MMBtu from $3.596/MMBtu. The price of the 12-month strip averaging August 2021 through July 2022 futures contracts increased by $0.06/MMBtu to $3.478/MMBtu.

World Markets

European shares slid on worries that coronavirus cases may once more spike and cause a derailment in the efforts to secure economic recovery. Furthermore, investors are concerned that central banks may shift to tighter monetary policies sooner than they originally intended to in response to a surge in inflation. The pan-European STOXX Europe 600 Index closed the week lower by 0.64%. The major European stock indexes mirrored the pan-European index. France’s CAC 40 Index dropped by 1.06%, Italy’s FTSE MIB Index dipped 1.03%, and Germany’s Xetra DAX Index slid by 0.94%. The UK’s FTSE 100 Index underperformed the other indexes, losing 1.60% of its value during the week’s trading. The core eurozone government bond yields declined in tandem with the move in US treasury yields, in reaction to the reaffirmation by the US Federal Reserve and the European Central Bank that the inflationary increase is merely temporary. Investors’ concerns about the delta variant and other rapidly spreading strains of the coronavirus appeared to weigh on yields. While the peripheral eurozone bonds tracked core markets in general, the UK gilt yields appeared to have bucked the trend and remained flat. The weredownward pressure on yields caused by the movement in the U.S. Treasuries was somewhat offset by the higher-than-expected inflation results in the UK and hawkish commentaries from some policymakers from the Bank of England.

In Japan, stock markets realized modest gains during this trading week. The Nikkei 225 Index appreciated 0.22% while the broader TOPIX Index gained 1.04%. The fourth coronavirus state of emergency was imposed on Tokyo this week, to continue until August 22 and covering the entirety of the Olympic Games. The announcement was in line with government efforts to mitigate the resurgence of COVID-19 infections. The highest daily count in new cases since January was recorded in the capital during the past week. In light of this development, the yield on the 10-year Japanese government bond dipped marginally to 0.02%, even as the yen remained unchanged at JPY 110.04 versus the U.S. dollar. Meanwhile, in China, the Shanghai Composite Index and large-cap CSI 300 Index gained 0.4% and 0.5% respectively in volatile trading. The announcement of China’s second-quarter gross domestic product (GDP) on Thursday was consistent with expectations, providing much-needed relief to the choppy markets. Equity inflows into China through the Stock Connect channel entered into positive territory as a result of the announcement of the most recent GDP data, exhibiting the highest data inflow in the last ten months. Foreign investors picked up financial, technology and consumer stocks with strong fundamentals. They generally avoided expensive counters such as electric vehicles. Regarding the pandemic situation, only a small number of new coronavirus cases were reported in some provinces in southern China.

The Week Ahead

In the coming week, watch out for important economic data to be released, including Housing starts, the PMI composite, the Leading Economic Indicators.

Key Topics to Watch

• NAHB home builders’ index
• Building permits (SAAR)
• Housing starts (SAAR)
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Existing home sales (SAAR)
• Index of leading economic indicators
• Markit manufacturing PMI (flash)
• Markit services PMI (flash)

Markets Index Wrap Up

Stock Markets

The stock market index benchmarks closed the week mixed as the large-cap and growth stocks surge higher for the second week in a row. Sectors sensitive to interest rate movement, such as the real estate sector, outperformed the rest of the market due to the plunge of the longer-term Treasury yields. Underperforming other sectors are the energy stocks, on the back of worries that the failure of major oil producers to see eye-to-eye will result in some of them disregarding the output agreements. The communication services sector was weighed down by weakness among media stocks. Friday’s recovery appeared to lift the markets higher, however, with the broader S&P 500 and Nasdaq Composite Index reaching record highs, possibly due to anticipation of strong second-quarter earnings reports in the coming week. This week’s trading was shortened by the observance of Independence Day on Monday, during which time markets remained closed.

U.S. Economy

The sentiment during the week was principally driven by the decline in U.S. Treasury yields. The benchmark 10-year Treasury note hit close to a five-month low on Thursday and retraced some ground thereafter before the week’s end. Early in the week, investors were heartened by the decline as equities were pushed up by the shift from fixed-income investments to corporate dividends, and the implied lower discount on future earnings. While equities investors welcomed the initial drop in Treasury yields, later in the week they became concerned that this decline signaled a slowdown in the future global growth. There were also worries that Chinese officials may ease monetary policy to drive its economy higher. Other economic news that came out during the week still indicated strong growth, but did come out more modest than expected. The ISM gauge of service sector activity in June was below expectations, while the IBD/TIPP Economic Optimism Index slid to its lowest level in four months. What went higher were the weekly jobless claims, and the May job openings rose less than anticipated.

• The labor market is expected to resume its momentum upward for the second half of the year, as a result of the expiration of extended unemployment benefits, rising wages, and the return of children to school. The unemployment rate will likely drop and job growth speed up. Together with high levels of household savings, these developments should drive an above-average rate of consumer spending that will likely result in an extension of the economic expansion.
• The quarterly GDP growth rates likely peaked during the first semester, but the U.S. GDP growth rate is historically more robust in the second half as it is expected to approximate 6% in the remaining two quarters of the current year. The possibility of imposing restrictions due to the emergence of more covid variants is remote but still concerning. Rising inflation still looms as consumer prices continue to increase at the fastest rate in three decades. Consumer demand continues to outpace supply. It is uncertain how soon supply will catch up because supply chain disruptions and labor shortages continue to remain tenuous. Steep increases in the prices of commodities such as lumber may prevail in the near future.

Metals and Mining

Gold rose 1.18% during the week, from $1,787.30 per ounce the previous week to $1.808.32 on Friday’s close. This was its best weekly performance in nearly two months, drawing its momentum from a weaker performance by the dollar and worries of the possible spread of the Delta variant of the coronavirus that may slow down global economic recovery. In light of the possibility that the country may see full employment in the next few quarters and that the U.S Federal Reserve is convinced that inflation may not breach the targets for the period, the gold may see $1,850 before the end of the year. Since gold is a hedge against economic and political risks as well as soaring inflation, buyers continue to be attracted by the uncertainties posed by the coronavirus in the future. The weakening of the dollar also made the yellow metal cheaper and therefore more enticing for investors holding other currencies.

As for the other precious metals, silver softened slightly, losing 1.40% when it closed the week at $26.10 from last week’s $26.47. Platinum gained by 1.00%, closing at $1,104.67 from the previous week’s $1,093.74 per ounce. Palladium likewise gained, higher by 0.78% from $2.790.29 at its previous close to $2,812.18 on Friday. Base metals were also mixed for the week. Among those that gained in value is copper, rising 1.53% from $9,376.50 to $9,519.50 per tonne. Zinc also rose by 16.20%, from $2,562.00 to $2,977.00. per tonne. Aluminum slid downwards by 14.77%, descending from the previous week’s close at $2,935.00 to $2,501.50 per tonne. Tin saw a slight gain, from $31.520.00 to $31.680.00 per tonne, or a marginal increase of 0.51%.

Energy and Oil

Oil prices surged forward on strong demand for fuel manifested by seven straight weeks of inventory draws. According to the U.S. Energy Information Association or the EIA, gasoline demand in the U.S. surged by 870,000 barrels per day (bpd) in the week just concluded. In light of the summer driving season, the country’s gasoline consumption figures reached a two-year record high. The crude oil inventory report of yesterday enabled prices to recover to profitable levels. Any further upside to oil prices appears limited, however, without an OPEC+ agreement as market participants continue to weigh the possibility of disagreements within the alliance. Prices will only be sustained if further discord is contained within the oil price cartel. Worries about a possible price war seem so far unfounded and pre-emptive, as the risk of such price war materializing is quite low. The OPEC+ is generally highly benefitted by the workings of the tight oil market, and would only expect this advantageous working relationship to be compromised in the event of a serious departure from their mutual agreement.

Natural Gas

The spot prices of natural gas descended at most locations during the report period June 30, Wednesday, to July 7, Wednesday. The Henry Hub spot price fell this past week to $3.60 per million British thermal units (MMBtu) from the previous week’s $3.72/MMBtu. The price of the August 2021 New York Mercantile Exchange (NYMEX) contract fell from $3.650/MMBtu to $3.596/MMBtu, a loss of $0.05. The price of the 12-month strip averaging August 2021 through July 2022 futures contracts slid to $3.416/MMBtu, a decrease of $0,01/MMBtu.

World Markets

European shares moved sideways during the week. It recovered from a sharp pullback earlier due to concerns of a resurgence of pandemic cases in light of new variants of the coronavirus. It was speculated that another round of restraints will likely jeopardize the global economic recovery and growth. The pan-European STOXX Europe 600 Index ended 0.19% higher for the week while major indexes were mixed. Italy’s FTSE MIB Index fell 0.91% and France’s CAC 40 Index descended 0.36%. On the other hand, Germany’s Xetra DAX Index climbed 0.24%. The UK’s FTSE 100 Index remained unchanged. The core eurozone bond yields mirrored the U.S. Treasury yields which ended lower for the week, although global bonds rallied. Weak U.S. services economic activity data, as well as coronavirus variant concerns brought equities lower, although they drove demand for high-quality government bonds, pushing yields down. U.K. gilts and peripheral eurozone government bonds followed core markets for the week’s trading.

Japan’s equities markets fell sharply during the week. The Nikkei 225 Index fell 2.93% while the broader TOPIX Index likewise slid 2.25%. The concerns about emerging coronavirus variants slowing economic growth were again echoed in this country, dampening investor sentiment and sending stocks lower. The yield on the 10-year Japanese government bond declined to 0.03% in anticipation that major central banks will continue with supportive monetary policy without any intentions of tightening anytime soon while the pandemic poses risks of resurgence. The yen rose to 110.01 against the U.S. dollar as a result of the strengthening of safe-haven demand. In the meantime, Tokyo will soon be placed under a state of emergency for the fourth time.

In China, stocks ended the week in mixed trading with equities registering mixed signals. The benchmark Shanghai Composite Index inched higher slightly, while the large-cap CSI 300 Index lost marginally. There was heavy selling in the technology sector in response to increased regulatory risk, as Beijing was reported to intensify oversight of U.S.-listed Chinese counters, most of which are classified under the technology sector. Additionally, domestic tech companies will continue to be the subject of a government crackdown. Regarding its monetary policy, the People’s Bank of China announced unexpectedly that it shall reduce its reserve requirement ratio (RRR). This is the amount of cash that the central bank requires banks to hold. This is expected to unleash some RMB 1 trillion worth of long-term liquidity into the economy. The RRR was more about the government reallocating credit to China’s small and medium-sized enterprises rather than about monetary easing. Since it was undertaken days before July 15 when China is scheduled to report its second-quarter GDP, the decision appears to be as much motivated by Beijing’s worries about flagging economic growth. China’s 10-year sovereign bond declined eight basis points to 3.02%. The renminbi lost 0.2% to end at 6.487 versus the U.S. dollar.  

The Week Ahead

The coming week brings several important economic data, among which are the Retail Sales growth, the Consumer Price Index (CPI) report, and the Hourly Earnings Growth

Key Topics to Watch

• NFIB small-business index
• Consumer price index
• Core CPI
• Federal budget
• Producer price index
• Beige book
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Import price index
• Empire state index
• Philadelphia Fed index
• Industrial production
• Capacity utilization rate
• Retail sales
• Retail sales excluding autos
• Consumer sentiment index
• Business inventories

Markets Index Wrap Up

Stock Markets

The stock market gained upward momentum with both the broad S&P 500 Index and the tech=heavy Nasdaq Composite Index closing a fifth successive quarterly rise. The Russell 1000 Growth Index saw an eighth straight weekly gain as large-cap growth stocks led the market advance this week. In the S&P 500, technology and health care stocks outperformed the other sectors although consumer discretionary stocks also showed strength boosted by solid gains in Nike shares. After their strong gains last week, the small- and mid-cap stocks took a respite this week with a minor correction. Although quarter-end rebalancing caused an increase in volumes traded, they remained relatively quiet. A long weekend awaits as the U.S. markets will remain closed on Monday in observance of Independence Day, since July 4 falls on the preceding Sunday.

U.S. Economy

The week saw the announcement of generally positive economic data. The index of consumer confidence performed better than expected as it posted a 16-month high. Surprising gains in housing prices spurred the sentiments of homeowners, and the labor market likewise exhibited robustness that buoyed American optimism about the recovering economy. The Labor Department released a Friday report that 850,000 nonfarm jobs – the most in the past ten months – were added by employers in June; for a change, this bested the consensus estimate of 700,000 by the highest margin since August of last year. The drop in weekly jobless claims was also better than expected, registering 364,000 which is the lowest it has been during the pandemic era. The biggest surprise of the past week was the pending home sales data which surged 8% in May, in contrast with the consensus expectations which bet on a slight decrease. On the low side, factory activity lost some ground by a bit more than expected based on the Institute of Supply Management’s indicator, although the figures still showed a relatively healthy expansion. The factors that impeded faster growth were identified as labor and material shortages.

• Although job gains were a welcome relief, unemployment climbed closer to 5.9% while labor participation remained unchanged. This indicated a failure to meet the Federal Reserve’s threshold for “substantial further progress.” Payrolls for the previous two months were adjusted upward by 15,000, with 40% of the gains contributed by leisure and hospitality, the sectors that lagged the most as a result of the pandemic. Hospitality has much more ground to cover despite outperforming the other sectors in the last five months. From its level in February 2020, employment in this sector is still down by 13%. There is enough momentum for this gap to be covered considering the strong vaccine roll-out, higher consumer savings, and pent-up demand.
• The rosy labor situation notwithstanding, it did little to change the outlook of the Federal Reserve. The Fed’s interpretation of the labor and inflation data is crucial as it will guide the monetary policy they will set out, which is likely to tighten aggressively and earlier than expected. As observed, the employment level remains short of its pre-pandemic level by 6.8 million. The Fed’s parameter for a full, broad-based, and inclusive employment situation, therefore, remains unmet. That being said, there appears to be no urgent reason for monetary tightening measures to be advanced, and the Fed will likely maintain its policy of accommodation for the near future. The speedy pace of job creation will likely encourage policymakers to adopt tapering over the next few months, a reduction in the rate of asset purchasing which is a step towards normalization but far short of tightening.

Metals and Mining

In the week just completed, gold rose slightly by 0.33% to end at $1.787.30 per ounce from $1,781.44. The buying interest in the yellow metal was spurred partly by a weakening of the dollar and investors’ assessment of possible monetary tightening policy by the Federal Reserve. The positive U.S. job report appears to have allayed the fears of a more aggressive policy by the Fed, although some reservations remain as a result of the slight increase in the monthly unemployment rate from 5.8% to 5.9%. Midway through trading, the spot price of gold hit $1,794.86, the highest it has seen since June 18. Another factor that contributed to this market optimism is the increase in U.S. nonfarm payrolls by a larger-than-expected figure at 850,000. The slow rate of coronavirus vaccination roll-out in some parts of the world also appears to have somewhat tempered investor sentiment as some countries in Asia and Europe walked back on their prospects of reopening.

As for the other precious metals, the price of silver increased by 1.42% for the week, ending at $26.47 per ounce from $26.10 the previous week. Platinum saw a slight correction with its close at $1,093.74, down by 1.53% from $1.110.72 per ounce. Palladium chalked in a solid gain of 5.67% with its jump from $2.640.45 to $2.790.29 per ounce. The week’s trading in base metals was mixed with the prices of copper and zinc rising and those of aluminum and tin falling. Copper ended 0.39% down from $9.413.50 to $9.376.50 per tonne. Zinc fell from $2.907.50 to $2.562.00 per tonne, a correction of 11.88%. Aluminum surged from $2.486.00 to $2.935 per tonne, a significant increase of 18.06%. Tin inched upward by 2.42% from $30,774 to $31,520 per tonne.

Energy and Oil

Controversy marked the OPEC+ meeting as the decision expected on Thursday was marred with a delay. The volume of the proposed production increase came at an average monthly addition of 400,000 barrels per day (bpd), which was smaller than the 500,000 bpd expected by industry analysts. Oil prices thus fell on the news. However, the outcome may still be bullish. The UAE delayed the deal as it asked for a higher production quota. This caused some difficulty in the negotiations. The OPEC+ is aware that the other members may protest should the UAE be given the authority to produce from a different base. The group will again confer on Friday.

In the U.S., gas prices reached their highest average level in seven years as motorists faced an extended holiday weekend. Banks have begun to reduce their exposure to the U.S. shale patch, compelling traditional lenders to cut their losses and reduce the risk on their energy loan portfolios. Alternative sources of capital have advanced to take over the U.S. energy debt at a discount and enter into equity or debt transactions that may enable them to realize expedited gains than would a bank loan. In their neighbor to the north, new regulations were announced to effectively prohibit the sale of gasoline and diesel vehicles in Canada in a plan to phase out internal combustion engine modes of transportation by 2035. This mirrors the current trend in Europe where EV sales rose to comprise 11% of all cars sold in 2020 compared to 3% in 2019.

Natural Gas

Liquified natural gas (LNG) prices around the world are seeing their highest levels in years mainly due to the elevated temperatures, particularly in the northern hemisphere. There is increasing demand for power generation to provide for air conditioning, while traders in other regions are beginning to replenish their stocks in anticipation of the increased demand for winter heating. The European gas markets title transfer facility (TTF) reached their peak levels in years, while the JKM marker, an important indicator for the spot market value of cargoes delivered ex-ship into the Asian markets, has jumped above $13 per million British thermal units (MMBtu). The deliveries to the markets in Japan, South Korea, China, and Taiwan constitute the majority of global LNG demand.

During the report week June 23 to June 30, natural gas spot prices rose at most locations. The Henry Hub spot prices increased to close at $3.72/MMBtu from the previous week’s close of $3.33/MMBtu. The July 2021 New York Mercantile Exchange (NYMEX) contract expired Monday at $3.617/MMBtu, an increase of $0.28/MMBtu from the previous week. The August 2021 NYMEX contract prices rose to $3.650/MMBtu, higher by $0.30 over the week earlier. The price of the futures contract for the 12-month strip averaging August 2021 through July 2022 grew by $0.21/MMBtu to $3.429/MMBtu.

World Markets

In Europe, equities were slightly lower due to concerns that inflationary forces may bring about an increase in interest rates. Another dampener on investor sentiment was the news that a highly infectious variant of Covid-19 was spreading and threatened the fledgling economic recovery. The pan-European STOXX Europe 600 Index slid 0.18%, while major indexes were mixed. Germany’s Xetra DAX Index gained 0.27%. Italy’s FTSE MIB Index gave up 0.89% and France’s CAC 40 Index likewise fell 1.06%. The UK’s FTSE 100 Index declined by 0.18%. The core Eurozone bond yields dropped in reaction to news of the spread of the Delta variant in Europe. The European Central Bank (ECB) President, Christine Lagarde, drew attention to the new virus threat and its impact on the economic recovery of the region. The peripheral bond yields followed the cue of the core markets, as well the UK gilt yields. The prospects of U.K. inflation were dismissed by Bank of England (BOE) Governor Andrew Bailey as being temporary, causing gilt yields to further decline.

The Japanese stock market returns slumped for the week also on concerns that coronavirus resurgence may materialize despite the vaccine rollout. The Nikkei 225 Index dropped 0.97% while the broad-based TOPIX lost 0.32%. The yen also declined in value to its lowest point since February of last year, ending the week at JPY 111.43 versus the U.S. dollar. The Japanese 10-year bond yield slid to 0.046%. Since the Olympics are slated for July 23, the government is assessing a possible extension of its July 11 expiration of its coronavirus restrictions. Presently, a quasi-state of emergency is in place as coronavirus cases appear to be trending up. Keeping the restrictions in place will reduce the maximum number of spectators allowed into the Olympic venues to 5,000. A ban is in place for spectators from outside the country, as Prime Minister Yoshihide Suga is prioritizing the safety and security of the Japanese people.

Equities trading for the week was similarly lackluster in China. Weekly losses were posted by both the Shanghai Composite Index and the large-cap CSI 300 Index after a correction from the biggest one-day drop on Friday for each bourse since March. The sell-down was attributed to profit-taking by domestic investment funds and open market operations by the country’s central bank to drain funds from the financial system. Investors were anticipating highly liquid markets leading into the celebration of the ruling Communist Party’s 100^th anniversary on Thursday, following a cash injection of the week ahead. There was an increase in the seven-day interbank rate of approximately 30 basis points above the official target, but analysts surmised that this was more a reaction of market pressures at quarter-end and was not necessarily indicative of tighter monetary policy. The People’s Bank of China announced in its latest policy meeting that it would maintain stability in the macro leverage ratio, which suggested that the central bank will forego any plans of tightening policy soon.

The Week Ahead

Looking forward to the coming week, investors can expect the release of the following key economic data: the PMI composite, Consumer Credit, and Domestic Auto Sales.

Key Topics to Watch

• Markit services PMI (final)
• ISM services index
• Job openings
• FOMC minutes
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Consumer credit
• Wholesale inventories

Markets Index Wrap Up