Fiat 50 motors on! – Investing Ireland August 2021
Last month marked the 50th anniversary of the “Nixon Shock” of August, 1971, whereby the US dollar’s unpegging from its Gold Standard straitjacket served to liberate the fiat currency printing presses of the global financial system in a manner that has fuelled a debt-financed asset-inflation odyssey for three generations of investors.
Equity markets duly celebrated this landmark anniversary with their 7th consecutive month of gains, that Worry Wall of Delta variant, peak growth (for economies and earnings), inflation risk, Fed taper talk and now Afghanistan still being climbed in resolute fashion by a TINA investment community amply lubricated by the excess liquidity drip-feed of current central bank policy settings.
The MSCI World advanced by a further 2.5% in August, its recovery from the March, 2020 lows now exceeding 100% (dividends included).
Value indices once again lagged Growth on both sides of the Atlantic, although the gap narrowed from previous months, with financials extending their recovery back towards cycle peaks.
The S&P500 secured it’s 54th record close ytd above 4,500 by month’s-end, whilst the STOXX 600 enjoyed 10 straight gains, its longest run of consecutive daily advances since 2006. Equity markets were not without their mid-month swoon, however, this a recurring (and perhaps options-expiry related) feature of the past several months.
Some acute intra-month volatility across bond and commodity complexes also; US real yields rebounded sharply from fresh record lows (-1.22% in 10yr TIPS) as taper talk resurfaced, Gold endured a $115 flash crash to sub-$1700 early-August before recovering above its $1800 pivot point, and Brent crude tested both ends of a $65-75 range-trade as COVID uncertainties abounded.
By contrast, currency markets were an oasis of calm, with Eur/USD still engaged in a sideways meander above its perceived 1.1600 floor.
Equities – Investing Ireland August 2021
Another month of gains for global stock markets, their 7th straight advance, both S&P500 and STOXX 600 indices now reporting total returns of 20%+ on a ytd basis.
A stellar Q2 corporate earnings season remained the primary impulse, although the Delta variant did impact on sectoral performance, the more defensive Nasdaq (+4.1%) once again showing the way on Wall Street.
Emerging markets (+2.6%) enjoyed their best performance since January, courtesy of renewed liquidity support from the People’s Bank of China, while the US Senate’s passage of a $550bn bipartisan infrastructure package was a timely reminder that overall policy support for economies and markets is not yet sated, the Fed’s taper talk notwithstanding.
Bonds – Investing Ireland August 2021
On the surface, bond markets were becalmed in August, with US Treasuries reporting their smallest move (-0.2%) in either direction for more than a year. However, yields did gyrate materially intra-month, with investors torn between the impact of a globally spreading Delta variant and that potential policy pivot by the major central banks.
The key 10yr Treasury yield touched a low of 1.13% early in the month, before an avalanche of Fed taper talk forced an abrupt about-turn to a 1.37% high late in the period.
The sell-off in Treasuries was compounded by renewed weakness in European government bonds, where the region’s highest headline inflation rate (+3.0%) since November, 2011 raised the spectre of a PEPP (asset purchase) dial-back by the ECB.
Currencies – Investing Ireland August 2021
A late-Summer lull descended over the foreign exchange markets last month, with relatively modest changes on the major crosses, although the US Dollar Index did manage to eke out a further 0.5% gain, while Sterling lost some ground on both USD and Euro fronts.
The dominant Eur/USD cross had an interesting month, recovering steadily from 1.1660 lows mid-August to a 1.1810 close. This exchange rate is now tracking relative short-term interest rate movements quite closely, and it has been the firming up of Euribor quotes in the midst of strengthening Euroland data-flow and some quasi-hawkish soundings from certain ECB Governors that is now supporting a revival of investor interest in the single currency.
Commodities – Investing Ireland August 2021
Although the CRB index flatlined in August following its recent steady gains, the energy components suffered their first decline since March, with both WTI (-7.4%) and Brent crude (-4.4%) selling off on concerns over slowing demand in China and the Delta variant more generally.
Industrial metals prices were also softer for the same reasons, whilst Gold prices endured a rollercoaster month, rebounding from a $115 flash crash in early-August to close broadly unchanged, that $1800 valuation level still exhibiting a magnetic attraction, be it from above and below.
Asset Market Outlook – Investing Ireland August 2021
- Equity markets now entering their seasonally most vulnerable period, with the build-up of more defensive investor positioning signalling correction concerns
- A mild pullback is certainly overdue although, remarkably, stocks are already cheapening on standard valuation metrics (both absolute and relative to bonds), whilst the degree of overall policy support (monetary and fiscal) remains acute
- Tentative indications of slowly declining Delta spread following two months of gains harbinger of a “Reopening Trade” revival to favour rotation back to cyclical stocks
- Corrective rally in global bond markets has seemingly now run its course, the prospective dial-back of Fed and ECB asset purchases ensuring more adverse supply/demand conditions and a return to higher yields
- USD rally finally running out of steam on fading relative interest-rate support, with Eur/USD eyeing a key 1.1950 retest, and scope for speculative longs to rebuild after a 3-mth flush-out
- Gold prices still not straying too far away from their $1800 pivot, with ETF holdings now stabilised and Asian jewellery demand in recovery mode; needs to vault $1830 for breakout
Asset Allocation – Investing Ireland August 2021 Outlook
Equities Bonds Credit Forex/Euro
US +1 -2 -1 -1
Euroland +2 -2 -1 N/A
UK +2 -2 -1 0
Asia +1 -1 -1 -1
Code +3/-3 very attractive/ very unattractive
Financial Market Performance Data – Investing Ireland August 2021 Outlook 
|US HIGH GRADE||-0.2||1.2||1.6||1.1||0.1|
|EUR HIGH GRADE||0.6||1.2||0.4||-0.8||0.3|
|OIL – WTI||-7.4||0.7||10.8||-6.8||41.2|
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