The FTSE All-World Index recovered from a sharp dip mid-month and ended the month in positive territory. Similarly, the US 10-year Treasury yield ended a volatile month lower with a slightly more dovish-than-expected rhetoric from Fed chair Jerome Powell at the conclusion of the Jackson Hole symposium, calming tapering fears into the end of the month. 

The JSE lagged behind the global market recovery but momentum was positive into the end of the month. The industrial sector was the main source of continued pressure on the local bourse. Within this complex, Naspers and Prosus detracted from the performance as Tencent remained under pressure amid regulatory concerns in China and the conclusion of the exchange offer resulting in added volatility in this space. The rand recovered into the month end, it still ended August on a slightly weaker footing.


Source: Bloomberg *27 July to 27 August 2021

Global outlook
 
• The investment case for emerging markets is becoming increasingly risky, particularly as global growth is likely nearing a peak and China continues to underwhelm as the credit impulse remains deeply negative.  
• Precautionary savings will likely continue unwinding, although consumers’ spending power should be relatively lower compared to the first half of the year.   
• We continue to believe that the dollar will depreciate amid its counter-cyclical nature with the reflationary growth cycle, although this may be nearing an inflection point.    
• The vaccine roll-out is expected to continue boosting broader equity markets in the short term.  
• Monetary policy is expected to remain accommodative in 2021; however, the US Federal Reserve is expected to start communicating its plans to reduce its asset purchasing programme in the second half of the year.  
• Inflation is expected to rebound in 2021 and remain relatively sticky, particularly in the US.  
• Commodities to remain elevated in the short term amid relatively strong demand dynamics and supply-chain disruptions.     
• Global yield curve movements have been relatively sporadic amid uncertainty on future growth, inflation, and policy dynamics. Accordingly, we believe a neutral duration position makes sense at this juncture.      

 
Economic overview

In the US, the focus was mainly on the Fed’s Jackson Hole Symposium in the last week of the month



On a preliminary basis, the IHS Markit US Composite PMI declined for the third month in a row to 55.4 in August 2021, well below expectations of 58.3. Output growth was at its slowest since December 2020, as weaker recoveries were seen in both the manufacturing and service sectors due to capacity pressures, material shortages and re-imposed lockdown restrictions. Retail sales increased 15.8% y/y in July, from a revised 18.7% in the month before, but remained above forecasts. The trade deficit widened to a new record of $75.7 billion in June, ahead of market expectations, with imports jumping 2.1% to an all-time high, while exports rose at a softer 0.6%. The unemployment rate declined to 5.4% in July – the lowest level since March 2020 – which was below market expectations of 5.7%. Annual inflation stood unchanged at 5.4%, reflecting Covid-19 base impacts, the reopening of the economy and continued supply-side constraints. In his remarks at Jackson Hole, Fed chair Powell said that the Fed will likely begin tapering before the end of 2021 although this action will not carry a direct impact on interest rates. The Fed will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2% and is on track to moderately exceed 2% for some time. The Fed left the federal fund's target rate range unchanged at 0% to 0.25% and bond-buying at a $120 billion monthly pace in July.

In the eurozone, data continued to point to a tentative recovery in economic activity

Preliminary estimates showed that the IHS Markit Eurozone Composite PMI deteriorated but remained elevated at 59.5 in August, slightly below market expectations of 59.7, pointing to a continued expansion in the bloc's business activity, with service sector growth exceeding that of manufacturing for the first time since the pandemic began. Still, consumer confidence weakened and was yet again below market expectations as sentiment deteriorated further over unrelenting coronavirus infections. The trade surplus narrowed to €18.1 billion in June, from €20 billion in the same period last year and in line with market forecasts as imports were up at a faster 28.2% while exports rose 23.8%. The seasonally adjusted unemployment rate in the euro area edged down to 7.7% in June, just below expectations of 7.9% as the number of unemployed persons decreased by approximately 423 000. Headline inflation was confirmed at 2.2% y/y in July, above the central bank’s target of 2%. The ECB revised its forward guidance on interest rates during its July meeting, stating that it expects interest rates to remain at their present levels or lower until it sees inflation reaching 2%. The central bank also retained the pace of its asset purchases program at €20 billion per month, reiterating that the Pandemic Emergency Purchase Programme (PEPP) envelope can be recalibrated if required. 

Data from the UK was mixed

Initial estimates showed that the UK’s gross domestic product grew by 22.2% y/y in the second quarter of 2021 – broadly in line with market expectations of 22.1% and ending a five-quarter period of contraction. According to preliminary reports, the IHS Markit/CIPS UK Composite PMI fell to 55.3 in August, from 59.2 in the previous month, which was well below market expectations of 58.4, signalling the slowest expansion of output since the private sector returned to growth in March. The GfK Consumer Confidence index edged down to -8 in August, compared to market consensus of -7. Retail sales volumes rose by 2.4% in July from a year earlier, missing forecasts of a 6% increase. The UK trade deficit rose to £2.5 billion in June, above expectations of £2.2 billion – this was the region’s largest trade shortfall since December 2020, as imports advanced 3.2% while exports fell 1.5%. The unemployment rate dropped to 4.7% in the second quarter of the year, below the market consensus of 4.8%, suggesting a slight recovery in the labour market. Annual inflation eased to 2% y/y in July, from a near three-year high of 2.5% in the previous month, and below expectations of 2.3%. The Bank of England left monetary policy unchanged during its August 2021 meeting, with policymakers reiterating that they do not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably. Still, officials signalled some modest tightening of monetary policy over the next two years was likely to be necessary if the economy continues to improve. The BOE also said it would start reducing its stock of bonds when its policy rate reaches 0.5% by not reinvesting proceeds and it would start considering selling stock of purchased assets when the rate reaches at least 1%. 

Data from Japan was mostly better than expected



The Jibun Bank Composite PMI reading fell to 45.9 in August, from a final 48.8 in the prior month, as shown by flash estimates. This was slightly ahead of expectations but signalled the fourth straight month of contraction in the private sector and the steepest pace since 2020, despite a further improvement in consumer confidence. Japan posted a trade surplus of ¥441 billion in July, shifting from a deficit of ¥14 billion in the same month a year earlier. This greatly exceeded the market consensus of ¥202 billion. Exports jumped 37% y/y while imports rose at a softer 28.5% y/y. The unemployment rate declined to 2.9%, against expectations of 3%. Consumer prices declined by 0.3% y/y in July, after a revised 0.5% drop a month earlier. This was the tenth straight decrease, amid weakening consumption due to further lockdown measures. The Bank of Japan left its key short-term interest rate unchanged at -0.1% and maintained the target for the 10-year Japanese government bond yield at around 0% during its July meeting, as widely expected. The central bank maintained its view that the economy was headed for a moderate recovery, revising up its growth forecasts for the next financial year.

China's data remained strong, but on balance was soft relative to expectations



China’s composite PMI for July jumped to 53.1 – up from June’s 14-month low – following a strong rise in overall business activity. Retail sales rose 8.5% y/y, easing from a 12.1% gain in the previous month and missing market forecasts of 11.5%. This was the weakest rise since December 2020. China's trade surplus was at $56.5 billion in July, well exceeding the market consensus of $51.5 billion. Exports grew 19.3% from a year earlier while imports rose 28.1.%. China’s surveyed urban unemployment rate inched up to a three-month high of 5.1% in June, above forecasts. The annual inflation rate edged down to 1.0% in July from 1.1% a month earlier, amid a steeper decline in food prices. This was still above expectations of 0.8%.

In South Africa, economic data was mixed