A positive week for Global Stocks

What happened last week?

A positive week for global stocks who rebounded from the previous weeks losses to post fresh all time highs and the best weekly gains since mid-April. Stocks generally moved steadily higher for most of the week, apparently boosted by a moderating fear of inflation as some data showed supply chain issues had peaked and were begging to ease. The market also sought confidence in more accommodative comments by Federal Reserve members, reversing the previous weeks surprisingly hawkish stance from the central bank.

The benchmark S&P 500 finished +2.74% for the week bringing it to just under 14% year to date. The more cyclically sensitive Dow Jones performed best, posting a +3.44% gain on the week to stand at +12.5% for the year. The technology heavy Nasdaq composite posted a +2.35% gain to sit at +11.42% for the year.

In the US, a closely followed survey out last week confirmed the economy continues to rebound and expand at record pace. The June Purchasing Managers Index, a leading indicator of economic activity, showed that output across the private sector expanded at an historically elevated rate. Data from the survey showed that consumers are returning to their typical (pre-pandemic) spending habits. This includes a more broad-based recovery in that consumers are starting to spend more money on services than goods, generally helping the local business more than the online behemoths (Amazon ect).

However, the survey also showed most firms are struggling to meet demand, suffering from raw-material and labour shortages. The supply shortage helped ease fears of runaway inflation, supporting analysts suspicions that it is the root cause of the recent high inflation readings and will prove temporary as output increases in the coming months. The shortage in workers for the lower skilled, lower paid jobs is a worry in the US and Europe. Large hospitality and entertainment groups are reported to be paying signing on bonus’s for hospitality staff as they struggle to get staff for re-opening. It is suspected this shortage will subside when the pandemic unemployment payments stop, naturally!

Despite largely shrugging off inflation fears for the majority of the week, Friday brought another high reading from the Federal Reserves preferred inflation gauge. The yield on the benchmark 10 year US treasury jumped on Friday morning following the news that the core personal consumption expenditures index had risen 0.5% in May, bringing the year-on-year increase to 3.4%, its fastest pace since 2008.

After weeks of negotiation, President Biden and a bipartisan group of senators announced an agreement on an infrastructure deal that carves out 579 billion from the 2.25 trillion American Jobs Plan budget that was announced a couple of months ago. The spending focuses on traditional infrastructure such as road and bridges as well as water and broadband. Importantly, for the stock market at least, it comes with no new tax hikes, either corporate or personal to pay for it. The deal will be paid for by reallocating unused pandemic relief funds.

Over in Europe, it was a similar positive week, although not as positive as the US and with a good bit more volatility. The broad equity benchmark, the Eurostoxx 600 index, ended the week 1.23% higher to rest at +14.45% year to date. The European stock market was helped by dovish comments from ECB President Christine Lagarde who states it was important “not to withdraw support too early”. President Lagarde also stated economic activity “should improve strongly” in the second half of the year and that inflation would level out at the start of 2022 as temporary factors elevating it fade out.

Unfortunately for Europe, the new big threat on the horizon is the spread of the more infectious Delta COVID-19 variant. The Delta variant is set to become the dominant force in the majority of European countries, with the UK recently reporting the most new daily single cases since February . Despite the rise in cases, the UK has proceeded to expand the list of countries its vaccinated nationals can visit without having to quarantine when they return. However, the EU is responding by reportedly planning to scrap quarantine-free travel from UK nationals to prevent the spread of the Delta variant. This move would have a negative impact on the economic recovery across the zone especially where some countries are highly dependant on tourism. It was rumoured over the weekend that Spain and Greece are prepared to break rank with the EU and allow vaccinated UK nationals to visit.

Given our proximity and relationship with the UK, it is inevitable that the Delta variant is soon to be the dominant one in Ireland. This has naturally led to rumours that the government are set to delay the re-opening of indoor dining and other services that had been due to re-open. July 5th has long been touted as the date when restrictions would ease further and a resumption of indoor dining, weddings of up to 50 people and other services essential to getting the economy back on track. The government are due to meet with NHPET and NIAC today to discuss the options available to them. If the rumours are to be believed, I would expect some angry resistance to any proposed delay in reopening.

What to look out for in the week ahead?

This week marks the end of Q2 and the official halfway point in the year. The end of a major reporting period such as this usually brings about higher than normal volatility as money managers and market participants seek to rebalance trading positions or lock in gains before the all-important reporting date.

In the US, the big economic data for the week is the June jobs report due out Friday morning, where analysts are expecting about 700,000 jobs to be added for the month. The labour market is a key component in the economic recovery and the market will want to see continued growth in jobs added as the economy re-opens. Recent jobs report have underwhelmed as employers complain about employee shortages, particularly for the lower skilled, lower paid employment sectors. Worker shortage in these areas can have a direct effect on inflation as it the costs of goods and services inevitable creeps higher as a result.

This week will also see more clarity around President Bidens infrastructure spending bill. Although declaring the deal to be passed, many political commentators are calling for hesitancy. The recent bill did not include items most important to the democrats such as childcare, climate change and education. These are expected to be proposed in another “human infrastructure” bill which is expected to be paid by tax increases. This is unlikely to be approved by the Republicans and as house leader, Nancy Pelosi stated last week that one bill cannot pass without the other, there is likely to be question marks around the validity of the agreement this week.