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July 2021 – Market Commentary

July 2021 – Market Commentary

It is summer for the markets despite the rain and cold northerly winds in the UK. The common narrative is that the Federal Reserve wont trigger anything that might spook the markets and if an external event comes along – an unknown unknown – then they have the tool kit to deal with it. The narrative is also that inflation is transitory and nothing to be concerned about. This a known unknown – we honestly don’t know the outcome so we need to watch the data closely, particularly consumer sentiment for a clue to retail sales and purchasing managers’ price expectations for the direction of travel of prices: both are rising for now.

What are the other data telling us at the moment. The indicator below combines the sentiment signal from copper, lumber, crude oil, equities, Canadian dollar, British pound, and treasuries. Two things stand out starkly in this chart: first – the plunge to 2008/09 levels during the peak of the panic last year; and second – the surge to multi-decade highs thereafter

But now some of the previous enthusiasm is starting to wane. This is worth keeping an eye on because it can end in one of two ways: it either keeps going and plunges and drives a deeper correction in the reflation/risk-on trade, or it stabilizes at a higher level and things keep trucking along. Either way, it is a clear sign that macro sentiment has peaked for now.

Value vs Growth – Defensive Value or Cyclical Value?  You can basically break value into “defensive“ (healthcare, utilities, consumer staples) or “cyclical“ (energy, financials). The base case is that cyclical value does the heavy lifting in the near term as it is the most directly linked to reopening/recovery and rising bond yields/commodities. Meanwhile defensive value likely kicks in later in the cycle when things rollover into central bank tightening mode which will most likely stall the economic recovery somewhat. A key pair of indicators to watch, globally and not just for the US value vs growth theme.

On a similar note, part of what favours global vs US equities is the sector weightings of the indexes. US benchmarks tend to have a much smaller weighting to “old cyclicals“ (financials, energy, materials, industrials) – which I would say is most closely linked to the global economic recovery in that those sectors benefit from stronger real activity. Given that their developed and emerging counterparts have nearly double the weighting to old cyclicals, it’s fair to say that global ex-US disproportionately benefits as economies reopen and the recovery progresses.

Another indicator to watch closely is global monetary policy tightening. Emerging markets have started the ball rolling and noises from the Fed suggest rate rises in the developed economies are being brought forward.

A mere 19 years after China entered the WTO, China has displaced the US as the world’s dominant trading partner. As an investment theme, albeit highly volatile with a long term time line, it is providing and increasingly large share of global GDP.

Charts data and thanks to