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Financial Market Review: Second quarter 2021

A quarterly review of results in the global equity, fixed income, currency, and commodity markets.

The views expressed are those of the authors at the time of writing. Individual teams may hold different views. The value of your investment may become worth more or less than at the time of original investment. For professional or institutional investors only.

Global equities (+7.2%) rose for the fifth straight quarter. Markets were bolstered by improving global economic data, fiscal and monetary stimulus, strong corporate earnings, and higher vaccination rates. A combination of surging commodity prices, pent-up demand, global supply-chain disruptions, and stimulus-powered economic growth continued to drive inflation expectations higher, prompting some central banks to raise interest rates or consider tighter monetary policy. The global decline in COVID-19 cases since mid-April came to a halt, with the rapid spread of the highly infectious Delta variant disrupting plans to lift lockdowns in many countries and reopen economies. US GDP grew at an annualized rate of 6.4% in the first quarter, and China’s economy expanded by a record 18.3% in the same period compared to a year earlier, as the world’s two largest economies continued to rapidly recover from a deep coronavirus-induced trough in early 2020. The US secured the backing of 130 countries for a global minimum tax (GMT) of at least 15% on corporations, as part of a broader agreement to overhaul international tax rules. The GMT would prevent multinational firms from avoiding taxes by shifting their profits to countries with low tax rates.

Global fixed income sectors generated positive returns in the second quarter. Sovereign yield curves generally flattened as central banks signaled a shift toward tighter policy stances in response to rising inflation, leading markets to perceive a lower risk of policymakers falling behind the inflation curve. Most fixed income spread sectors outperformed as vaccination rates increased, economic data strengthened, and credit fundamentals continued to improve. The US dollar ended mixed.

Commodities (+15.7%) surged, with all four commodity sectors ending higher.

Equities

United States

US equities (+8.5%) rallied for the fifth consecutive quarter amid a backdrop of improving vaccination rates, accelerating economic growth, and a broader reopening of the economy. Inflation rose sharply during the quarter, as robust demand for goods and services, along with significant global supplychain disruptions, drove consumer and producer prices sharply higher. The US Federal Reserve (Fed) held steadfast in its view that elevated price pressures should prove transitory, but the Fed rattled markets by considerably raising its inflation forecast for 2021 and signaling the potential for two interest-rate hikes in 2023. This hawkish shift in expectations triggered a rotation from value and cyclically sensitive stocks to growth stocks toward the end of the quarter. A bipartisan group of senators reached an agreement with President Joe Biden on an infrastructure package worth approximately US$1.2 trillion. The package faces significant legislative hurdles, with Democratic Party leaders insisting the plan could only advance in tandem with a much larger social policy bill funded through higher corporate taxes, which are vehemently opposed by Republicans. First-quarter corporate earnings vastly exceeded expectations, with the blended year-over-year earnings growth rate for the S&P 500 Index registering 51.9%. The forward 12-month price-to-earnings ratio for the index ended the second quarter at 21.4.

Economic data released during the quarter indicated strong upward momentum in the US economy and rapidly rising inflation. The labor market strengthened on improving job growth, declining initial jobless claims, and falling unemployment. However, pandemic-related frictions and supply-and-demand imbalances contributed to…

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