Weekly Market Insight

Weekly Market Insight – 26th July 2021

26th July 2021

Equities continue to climb to record highs, bond yields trend lower and is your morning coffee about to get more expensive? Read all about this and more in this week’s Insights from BlackBee.

Economy

Eurozone business activity expanded at the fastest rate for 21 years judging by the July IHS Markit’s composite PMI (purchasing managers’ index). July’s index reading was 60.6, up from 59.5 in June. An index level greater than 50 indicates growth. This month’s increase means that the Eurozone’s business activity is growing at a healthy rate as restrictions ease and the deployment of vaccinations continue at pace. In our Chart of the Week, we note that service-based businesses are the main contributor to this expansion. This week the ECB announced that interest rates will remain at the existing negative and potentially even lower levels until inflation comfortably reaches and remains at 2%. The ECB expects Eurozone inflation to reach 1.9% in 2021 before falling back to 1.5% and 1.4% in 2022 and 2023 respectively. In our view, with negative rates forecasted until at least 2023, the hunt for yield in European in assets is only going to intensify. Secondly, it is not clear when or how the ECB expect to reach this targeted 2% inflation rate! In the US, there was mixed releases with regards to economic data. The number of new housing starts in June were ahead of forecasts (1.643 m actual vs 1.590 m surveyed). In our view this reflects insufficient new builds (similar to Ireland) post Global Financial Crisis, in addition to playing catch up to 2020’s construction hibernation. Interestingly, last week in the US there was an increase in jobless (initial unemployment) claims as well as a decrease in mortgage applications. Are these the first signs of the post Covid economic boom starting to taper?

Equities

Equities indices continue to climb to record highs although there was a small speed bump earlier in the week when on Monday, equity markets took a significant retreat. Fears of delta and future variants made investors question the sustainability of the forecasted long-term economic growth. European bourses had their worst session of the year Monday and the S&P 500 had the largest single day loss in over two months. From Tuesday trading onwards though it was as if those fears never existing and the S&P 500 and Euro Stoxx 600 rallied back to all-time highs on Friday. As mentioned previously, the hunt for returns is directing investors towards equity markets but this week companies backed it up with strong earnings announcements. According to Bloomberg, a staggering 87% of S&P 500 companies reporting earnings this season surpassed analysts’ expectations. Given the snapback in prices on Tuesday, VIX volatility index reached its highest point (22.50) since May. The 100 Day moving average is 18.67.

Bonds

European yields decreased following the ECB’s comments on Wednesday ensuring accommodative monetary policy for the foreseeable future (until inflation rates reach and stay at 2%.) Low interest rates in the monetary union are preferred by countries with high debt/GDP levels for example Italy. In Germany however, where transitory inflation is expected to surpass 2% this year, there is caution about the ECB’s long-term commitment to these historically low interest rates. 10-year yields in Italy and Germany traded Friday at 0.618% (89 basis point weekly decrease) and -0.42% (67 basis point weekly decrease) respectively. Yields across the US Treasury curve traded slightly lower last week also (10 year yields dropped by 10 basis points to trade at 1.27% Friday). In our view, a potential indicator of the US bond market’s caution about the sustainability of the recent economic growth.

Commodities

Oil rebounded slightly last week following the recent drop following the OPEC+ agreement to increase supply levels. Meanwhile, precious metals retreated last week. Gold and silver are often seen as good hedging instruments against inflation risks. Industrial metals performed strongly as accomodative monetary policy (for example in the Eurozone) is expected to support fiscal spending. Coffee prices rose by 17% last week as frost has impacted Brazilian coffee crops.

Sector News:

Q1 2021 saw four times increase in household savings

Irish households saved more than €10 billion in the first quarter of 2021 – four times the amount usually saved in that period of the year, according to the Central Statistics Office (CSO). The CSO stated that the high level of saving was due to incomes either holding up or increasing at a time when opportunities to spend money were limited by economic restrictions designed to stop the spread of Covid-19. The CSO said uncertainty about the trajectory of the pandemic may also have encouraged a greater degree of precautionary savings as consumers stored up money in anticipation that their finances would tighten in the future. Some savings also went into pension funds or were used to pay off mortgages and other loans. Capital investment in new housing and improvement to dwellings was largely unchanged compared to the same period in 2020, which the CSO said was perhaps because of restrictions on construction activity. The household savings ratio of 31 per cent compares to a ratio of 25.8 per cent in the final quarter of 2020. The largest proportion of the extra saving was added to deposits in Irish banks and most of these deposits are available immediately to households to use as restrictions ease. As indoor dining resumes today for the first time since December, the hospitality sector will be eager to receive some of these excess savings.

Consolidation in Irish financial sector

In one of the busiest weeks in Irish financial services history, Davy has agreed to the sale of all of their assets in three separate tranches for a combined €605m. Bank of Ireland has reached a deal to buy Davy’s core capital markets and wealth management businesses for an enterprise value of €440 million, with the possibility of up to €40 million of further payments from 2025, subject to the performance of the business. The bank will pay a further €125 million for excess cash on Davy’s books. A large portion of which will come from the agreed sale, of Davy Global Fund Management (DGFM), the company’s fund servicing and fund management arm, to Luxembourg-based IQ-EQ. In further news for the sector, Permanent TSB (PTSB) and Ulster Bank’s owner, NatWest Group, said in statements on Friday morning that they had signed a memorandum of understanding on the shape of a proposed deal where PTSB plans to acquire €7.6 billion of loans and 25 branches from Ulster Bank. It would also see between 400 and 500 Ulster Bank employees transfer. The proposal also envisages NatWest taking up to a 20 per cent stake in PTSB as part payment for a deal that is expected to increase the size of the Irish State-controlled bank’s loan book by over 50 per cent to about €22.5 billion.

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