Week from 26 to 31 July 2021
Chinese stocks took a nosedive, wiping out hundreds of billions of dollars in market value after Beijing introduced harsh regulations targeting some of the nations industries. Meituan which runs one of China’s biggest food delivery platforms lost more than 21% week-over-week, as Chinese regulators have imposed new standards for delivery workers. The new private tutoring rules hit New Oriental Education & Technology Group Inc (-26%). Educational training institutions are now banned from raising capital through IPOs and from foreign investors. Tencent sank 8.51% after the world-leading internet and technology company suspended registrations for its flagship app (WeChat), as the tech sector continues to face increased government scrutiny. With signs of investors panicking, the Shanghai composite fell 4.31% and Hong Kongs Hang Seng tumbled 4.98%.
Chinas clampdown on the tech industry spooked foreign investors and had spillover effects on the U.S. markets.
The S&P 500 closed lower (-0.37%), though many companies reported better-than-expected earnings and the Federal Reserve kept its monetary policy measures steady. The Dow Jones Industrial Average slipped -0.36% while the tech-heavy Nasdaq was down -1.11%. Against this backdrop, small cap stocks managed to beat their large-cap counterparts (Russell 2000 up +0.75%). In Europe, the MSCI EMU edged lower (-0.25%) with a new surge in Covid cases.
The U.S. GDP increased at a 6.5% annualized rate in Q2, well below expectations for a rise of 8.5%. Moreover, U.S. jobless claims stood at 400,000 in the week ended July 24, instead of falling to 380,000 as expected. Yet the upside surprise in consumer spending (+1% in June after dipping -0.1% in May) offset this poor data, supporting cyclical sectors such as materials (+2.78% over the week), energy (+1.59% as oil prices climbed WTI crude up +2.61% – amid a fall in the dollar EUR-USD up +0.80%) and financials (+0.71%).
In contrast, consumer discretionary dropped -2.57% as Amazon plunged -9% after the company said sales growth would slow in the next quarters. Communication services were also among the losers of the week (-0.96%) with Facebook falling -3.65% after warning of a possible slowdown in advertising revenue. Same trend for information technology: Apple and Microsoft were down -1.82% and -1.64% respectively though their earnings beat analysts’ forecasts and their revenue topped expectations.
Bond Rally Still Alive
U.S. government bond yields continued their decline for the sixth week in a row, with the 10-year Treasury yield touching its lowest level in nearly six months (+1.24%). Core European benchmark yields were also trading lower (10-Year Bund yield at -0.46%, French OAT yield at -0.10%).
Their downward trajectory pushed again investment grade corporate bond prices higher (+0.20% in Europe, +0.58% in the U.S.). High-yield bonds followed suit though to a lesser extent (+0.15% in Europe, +0.08% in the U.S.). Emerging debt offset the loss suffered last week (+0.81% in local currencies) as the greenback weakened against a basket of major currencies (dollar index at 92.09, or -0.88% over the week). The dollar emboldened gold too (spot price gaining +0.67% at $1,814.18 an ounce).