International Communique No. 301 – 10th August 2021


Benchmark equity indices, both in Europe and the US, went on to set new records last week on the back of superb quarterly earnings figures and upbeat macroeconomic news – offsetting fears of coronavirus variants impacting economic output.

In the US, the non-manufacturing PMI shot up in July, staging its fastest monthly rise since 1997 to strengthen to 64.1 – considerably above the estimated 60.5 – as the business activity, new orders, prices and employment component each gained, responding to the demand spurt from the lifting of pandemic-related restrictions. Since services occupy for close to 80% of the US workforce, which is good news for jobs and GDP growth.

Eagerly awaited job stats testified to the impetus of the US economic upswing, with additions surging to 943,000 in July whereas the consensus forecast was 845,000. Admittedly, the forecast range at between 350,000 and 1.2 million was huge – a sign of the current uncertain times. Furthermore, job creation in June was revised up to 938,000 while, in July, the unemployment rate tumbled to 5.4%. Wages were up 0.4% month over month, which was faster than expected. Similarly, initial jobless claims ebbed further, declining to 385,000.

It’s anybody’s guess on what the Fed will do next. It might announce tapering starting in 2022 when next meeting in September, a prospect that has stoked fears and nudged the 10-year yield to 1.3%. Some view that it would be too early. The Fed has always stated that it would not withdraw monetary stimulus so long as the job market has not yet recovered. Pandemic-induced job attrition, relative to February 2020, still stands at 5.7 million.

Corporate earnings publications for the second quarter have blasted through estimates, and the uptrend in guidance revisions continues – not only for the next two quarters but also for 2022 as well. Amid European firms, earnings growth stood at 159%, which was 32 percentage points higher than the consensus estimate. This earnings trend is providing vital support to equity market performance in the face of the expanding delta variant and the shockwave from tighter Chinese regulations. Dividend payouts and share buybacks are currently all the rage. In the US, over 70% of S&P 500 members have reported their figures. Earnings and sales have shown record increases of 86% and 21%, respectively. Guidance indicates earnings growth of 40% and 10% for 2021 and 2022, respectively.

Even though higher production costs could eat into margins and shares are already expensively priced, the equity markets is believed to still have some upside.

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