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Market Insights – September 6, 2021

Each week, our Investment team shares its market views with you.

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Essentials

The strict lockdown measures imposed by the Chinese government clearly weighed on that country’s economic activity in August. Both manufacturing and non-manufacturing purchasing managers’ indexes came in below expectations. However, the most recent wave of infections has been swiftly brought under control, which should lead to a rebound in the autumn.

US stock market indexes reached new record highs last week, driven by quality stocks and particularly those in tech, health care and consumer staples. The return to these growth stocks, which offer greater visibility about their activities going forward, began in the early summer and should continue over the coming weeks.

US job creation figures were much weaker than forecast in August. There were just over 200,000 new jobs, compared with the 730,000 predicted by economists. Investors appeared to welcome this low figure – which is perhaps attributable to the renewed surge in cases caused by the Delta variant – because it could mean that the Fed will hold off slightly on its planned tapering.

The ECB should bide its time

The European Central Bank (ECB) will meet this week. ECB president Christine Lagarde has not really said much since Jerome Powell announced an upcoming policy shift at the gathering of central bankers in Jackson Hole. Numerous economists are already speculating that the ECB might be tempted to follow in the Fed’s footsteps and announce that it will begin tapering soon as well. Some members of the ECB’s Governing Council seem to be in favour of scaling back the asset purchase programme, which currently stands at close to EUR 100 billion a month. These members – most of whom come from the region’s more frugal northern countries – probably came to this conclusion because of the success of Europe’s vaccination campaign, which has sharply reduced the risk of another economic downturn, and because eurozone inflation appears to be picking up.

Nevertheless, it would be wise for the ECB to lag behind the US in the monetary policy cycle for the time being. First of all, the rebound in eurozone growth has been nowhere near as robust as that recorded in the US, and Europe’s economy is by no means at full throttle. The same is true for inflation – prices are rising at a much slower pace than they are in the States. And unlike in the US, the eurozone has been dealing with structural disinflation for many years now, and that trend will be hard to shake off. But the main reason for the ECB not to tighten monetary policy just yet is the euro’s current trend against the dollar. In recent days, expectations of tapering by the ECB have sparked early signs of tension on long-term interest rates in the region and caused the euro to rise against the dollar. Let’s not forget that the single currency has gained close to 9% against the greenback since the start of the pandemic. Holding off on normalising monetary policy is probably the only way that the ECB can prevent the euro from gaining too much ground – a strong euro would make the eurozone less competitive and could even derail the economy if the public health situation takes another turn for the worse. For stock market investors, a weaker euro will also make it easier for European equities to keep catching up with their US counterparts, which continue to post new highs.

Japan's prime minister falls victim to COVID

Japan’s prime minister, Yoshihide Suga, will step down just one year after taking office. His announcement last Friday that he would not stand in the Liberal Democratic Party’s leadership election at the end of September came as a surprise. Yet, his popularity had reached an all-time low, and his decision will give the party’s new leader, who is guaranteed to become prime minister, a better chance in the legislative elections this autumn.

The Delta variant caused irreparable damage to Mr Suga’s popularity. In a recent poll, his approval rating dropped to below 30%, compared with around 60% when he replaced his predecessor. This was mainly because of his handling of the pandemic. People became even more dissatisfied when he went ahead with the Tokyo Olympics even though a large majority of the population opposed this decision. Japan is a good illustration of how things now stand in countries that were slow to get their vaccination campaigns off the ground. The effectiveness of the zero-COVID strategy – based primarily on states of emergency and lockdowns – has shown its limits against the Delta variant.

The market welcomed Suga’s announcement. The Topix rose on the news, reaching its highest level since 1991. Investors are betting that this change will increase the chances of further stimulus in the months to come. We remain bullish on the Japanese market. The economy should continue to be boosted by the global economic recovery, and the soft yen is providing further support. This political event could trigger a market rally before the end of the year.

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