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Monthly markets review - July 2021

A look back at markets in July when China's announcement of tighter regulation for the education sector weighed on emerging markets.



Investment Communications Team
Investment Communications Team


  • Developed market equities gained in July but emerging markets saw a sharp decline as China announced new regulations for the education sector.
  • Government bond yields declined (meaning prices rose), as concerns over the Covid-19 Delta variant and some signs of global growth moderating caused investors to shift toward safer investments.
  • Commodities gained, led by the industrial metals component.


US equities ended July higher again, despite contending with intermittent volatility. Fears over Covid-19 cases - in the US and globally - called into question the sustainability of economic momentum. In addition, the Chinese government intensified its focus on regulation, particularly in the tech and private education sectors, which introduced further uncertainty. However, both factors were ultimately overshadowed by the strong earnings season and equities rose.

China’s ongoing drive to assess and control the societal influence of large companies hit the New York-listed shares of ride-hailing app Didi hard in early July. The broader implications of the tighter regulatory scrutiny sent ripples through US equity markets that unsettled investors. Adding to these concerns was the rise in cases of the Delta variant of Covid-19.

Even so, data continues to paint the US economy as healthy. In the July Federal Reserve (Fed) meeting, the Fed acknowledged that the economy was making “progress” in-line with its mandate but said that tapering (i.e. slowing the pace of asset purchases) would require additional improvements – particularly in the labour market. It also acknowledged that there was upside risk to the inflation outlook, but retained the view that this would be transitory. Consumer confidence as measured by the Conference Board stayed at high levels in July unchanged from previous months, although the University of Michigan consumer confidence figure dropped to a five-month low as consumers cited inflation.

Earnings for Q2 emerged as the most influential factor. The proportion of US companies beating earnings estimates for Q2 is currently running far ahead of the five-year average.

The energy sector was notably weaker in July, with worries over excess capacity adding to growth concerns. Most other areas made progress. Healthcare, real estate and utilities were among the strongest sectors.


Eurozone equities notched up gains in July. Top performing sectors included information technology, real estate and materials. The energy sector was the main laggard. July saw the start of the Q2 earnings season which has overall been very strong so far, even given the soft comparison of Q2 2020, with around 50% of companies due to report results having done so by the end of July.

Meanwhile, the vaccine roll-out accelerated with Spain, Italy and Germany all overtaking the US in terms of the share of people fully vaccinated against Covid-19. This boosted hopes that rising cases of the Delta variant would not necessarily lead to further lockdowns and restrictions on economic activity.

Eurozone business activity grew at the fastest rate for 21 years in July. The flash composite purchasing managers’ index reached 60.6, compared to 59.5 in June, with services activity offsetting a slower pace of manufacturing growth. (The PMI indices, produced by IHS Markit, are based on survey data from companies in the manufacturing and services sectors. A reading above 50 signals expansion.)

Eurostat data showed eurozone GDP grew by 2.2% in Q2, after a 0.3% decline in Q1, while annual inflation ticked up to 2.2% in July versus 1.9% in June. The European Central Bank concluded its strategic review, tweaking its inflation target to 2% (instead of “below but close to 2%”).

The European Commission announced a package of proposals (“Fit for 55%”) designed to help the bloc meet its goal of cutting harmful emissions by 55% by 2030, as an interim step to reaching net zero by 2050. The initiative includes a proposed carbon border tax, expansion of the Emissions Trading System, increased use of renewable energy, fuel taxes, and faster roll-out of low emission transport modes.


UK equities rose over July, although many defensive large cap overseas earners performed poorly, partly due to sterling strength against both the US dollar and the euro. It was a volatile period as markets initially sold off in the first part of the month amid ongoing fears around the global growth outlook and the spread of the Delta Covid-19 variant.

As appetite for risk returned, however, and markets bounced back in the second part of the month, many economically sensitive areas of the market performed well. Defensive sectors, meanwhile, struggled to make any progress during the second half of July. As a result, defensives underperformed economically sensitive areas over the month as a whole.

The market recovered well in the second half partly on the back of some very strong Q2 results, including from the basic materials, financials and energy sectors. Meanwhile, economically sensitive mid-cap equities performed very well over the month as a whole – ongoing merger and acquisition activity was partly a factor here.

The Office for National Statistics confirmed that the UK economy grew by 0.8% in the month of May, well below consensus expectations of 1.5% growth, and much slower than the revised 2% growth achieved in April. Supply shortages and production bottlenecks were seen as an issue, with manufacturing output contracting by 0.1% in May, following no growth in April.

Most legal restrictions on social contact were lifted in England on 19 July. Although there was a pick-up in Covid-19 infections just prior to this date, daily infection rates unexpectedly tailed off as the month progressed, despite increased levels of social interaction.

Fears around the potential consequences of a “pingdemic” for the economy featured highly in the month. This was as many workers were advised to self-isolate by government’s Covid-19 app.

Asia ex Japan

Asia ex Japan equities recorded a negative return in July, led lower by China after a crackdown by Chinese authorities on technology and education companies prompted a sharp sell-off. A frosty start to US-China talks and credit concerns also further weakened investor sentiment. As a result, China was the worst-performing index market in July, recording a decline of 13.4%.

Concerns affecting China also spilled over to Hong Kong, with shares there down 2.9% over the month. Yuan volatility also frayed investor nerves.

The Philippines was also sharply lower in July compared to a month earlier, recording a decline of 11.7%, after the government announced stricter lockdown restrictions due to rising cases of the Delta variant of Covid-19. Stock prices in South Korea declined in July, as investors flocked to Wall Street on optimism over strong US corporate earnings. Shares also came under pressure from rising cases of Covid-19, while the government tightened social distancing rules in a bid to halt the spread. Thailand, Malaysia and Taiwan were also weaker in July, while the decline was less pronounced in Pakistan.

India was the only market in the MSCI AC Asia ex Japan index to end the month in positive territory.


The Japanese stock market ended July at the bottom of its recent range, recording a loss of 2.2% for the month. After weakening against the US dollar for most of 2021 to date, the yen strengthened slightly in July.

Equity market sentiment was dominated by the worldwide increase in Covid infections, particularly driven by new variants. There was also significant concern domestically as infections picked up towards 10,000 per day nationwide in Japan. Given the size of the population, this remains well below the levels seen in many developed countries but nevertheless led to growing public anxiety.

This has been compounded by the timing of the Olympic Games, with the government trying to convince the population that it is taking the necessary action to contain the rise in infections, while simultaneously hosting a global sporting event.

A state of emergency was re-imposed in Tokyo in early July, and spectators were banned from most Olympic events, with restrictions also extended throughout August. This led to near-term recovery expectations being pushed out slightly.

Opposition towards the government’s approach has been rising and, in July, public approval for the Suga cabinet fell to just 33%, the lowest level since he took office last September. Near-term prospects for the full recovery of the domestic economy are more dependent on the continued success of vaccine roll-out, which has continued to accelerate since late May.

The corporate results reporting for the first quarter of the fiscal year started in late July. The bulk of companies will report in early August, but initial indications look positive against expectations.

Emerging markets

Emerging market equities registered a negative return in July, led lower by a market correction in China. The announcement of a new regulatory framework for the Chinese education sector, which went far further than markets had anticipated, was the main catalyst for the sell-off. And this led to concerns that regulatory investigations, which have previously impacted the internet sector, could intensify and/or be widened to other sectors.

The Philippines and Thailand both lagged the MSCI EM Index as daily new cases of Covid-19 increased; the share of the population fully vaccinated is sub 10% in both countries. Peru remained under pressure owing to concerns over the policy outlook.

By contrast, Egypt recorded a positive return, underpinned by strong performance from CIB, and was the best-performing market in the index. Turkey, aided by lira strength as the central bank held its policy rate firm at 19%, and Argentina, where strong performance from Globant proved supportive, both generated solid gains and outperformed the index. India recorded a modest gain as daily new cases of coronavirus cases eased, improving the outlook for economic recovery. 

Global bonds

Government bond yields declined in July (meaning prices rose), as concerns over the Covid-19 Delta variant and signs of global growth moderating caused investors to shift toward safer investments. While the economy continued to recover, with lockdown measures increasingly lifting, there were signs of the growth rate slowing, particularly in China.

The US 10-year yield fell from 1.47% to 1.23%, further retracing the large move higher seen in the first quarter. Comments from the Federal Reserve’s (Fed) policy meeting noted continued “progress” in the economy and repeated the message that inflation will likely prove mostly transitory.

The UK 10-year yield fell from 0.72% to 0.57%. The UK significantly relaxed lockdown restrictions in July, but Covid cases began to rise once more.

Europe too saw rising rates of Covid, though the economy continued to do well, benefiting from easing lockdown measures. German inflation hit an annualised rate of 3.8% in July, the first time above 3% since August 2008. The German 10-year yield fell from -0.20% to -0.46%, while Italy’s fell from 0.82% to 0.63%

Corporate bonds made positive returns, but underperformed government bonds, particularly in the US. Investment grade outperformed high yield, with the latter impacted by the slight stumble in risk appetite, having had a strong period of performance. Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade.

Emerging market (EM) government bonds were also modestly higher. So too were EM corporate bonds, though high yield credit saw a small decline. EM currencies were mixed against the US dollar.

The Refinitiv Global Focus index, which measures balanced convertible bonds, fell 1.4% in July compared to a gain for the MSCI World global equity index. Convertible bonds were less equipped to keep up with the equity advance, as markets once again rotated out of the growth companies that dominate the convertible bonds universe and into value plays. On the same note, large cap companies outperformed versus their small cap peers.


The S&P GSCI Index recorded a positive return in July, with strong growth in the industrial metals and energy components of the index as the global economy recovers from the Covid-19 pandemic. Industrial metals was the best performing component in July, with nickel and lead achieving the biggest price increases. Aluminium and copper also achieved robust growth in the month, while zinc achieved a lower level of growth. The energy component of the index also achieved a positive performance in July, led by strong price gains for natural gas and unleaded gasoline. 

The precious metals component also gained in July, with higher prices for gold. The price of silver, however, declined in the month. The livestock component of the index achieved a small gain. The agriculture component of the index saw a negative performance over the month, led lower by a sharp decline in the price of corn and a more modest fall in the price of soybeans. Cocoa was marginally lower, while the price of coffee was sharply higher.


Total returns (net) % – to end July 2021


Source: Thomson Reuters DataStream.
Local currency returns in July 2021: *-2.2%, **0.6%.

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Investment Communications Team
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