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LGT Navigator: Increasing risk awareness

July 7, 2021

A slowdown in growth in the US service sector led to restraint among blue chips on Wall Street after the holiday-related long weekend, while technology stocks were in demand. In general, an increase in risk awareness or risk aversion of investors can be observed in the short term. Today, the focus is on the minutes of the latest monetary policy decision of the Federal Reserve, from which investors hope for new insights into the future direction of the Fed.

Increasing risk awareness

After the long weekend and losses on Europe's stock markets, investors were cautious on the New York Stock Exchange. As a result, the Dow Jones Industrial declined -0.6% to 34,577.37 points and the S&P 500 fell from record levels -0.2% to 4,343.54 points. Technology stocks fared better. Thus, the Nasdaq 100 selection index improved on Tuesday by +0.4% and closed at 14'786.36 points.

Asian equity markets suffered on Wednesday from an increased risk aversion of investors in view of the uncertain pandemic development in the region. The MSCI index of Asia-Pacific shares (excluding Japan) fell about half a percent, while in Tokyo the Nikkei 225 index lost about -1.3%. At the same time, the recent rally in US government bonds continued, with the yield on 10-year Treasuries easing to 1.35%, the lowest level since February 24.

US services sector running out of steam somewhat

In the United States, growth in the service sector slowed again somewhat in June, held back by shortages of labor and raw materials. The Purchasing Managers' Index (PMI) of the Institute for Supply Management (ISM) fell from 64.0 points in May to 60.1 points. Mind you, the previous month's reading is a record high. However, the PMI for the service sector, which accounts for more than two-thirds of US economic activity, remains well above the 50-point growth threshold. The ISM survey was confirmed by the London-based IHS Markit's Purchasing Managers Index, which was of the same gauge, weakening to 64.6 in June from 70.4 the previous month. As a result, the composite index for the US private sector – industry and service providers combined - also slipped to 63.7 points from 68.70.

ZEW economic expectations surprisingly weakened

According to the latest survey results of the Mannheim Center for European Economic Research (ZEW), the economic expectations for Germany of the monthly surveyed financial analysts and institutional investors have deteriorated more strongly than expected in July. Accordingly, the corresponding indicator dropped from 79.8 points in June to 63.3 points in July. On average, analysts had expected a decline to 75.0 points. Overall, however, economic expectations remained at a very high level –in May, the index reached its highest level in around 20 years at 84.4 points. According to the ZEW, many financial market experts anticipate an above-average positive macroeconomic situation over the next six months.

ECB Governing Council reviews monetary policy strategy

According to a report by the financial market service provider Bloomberg, the top body of the European Central Bank (ECB) is currently discussing its monetary policy strategy. For example, the future design of the inflation target – symmetric inflation target with more flexibility or explicitly allowing higher inflation rates – is to be discussed. The future composition of corporate bond purchases is also to be a topic. An increasingly important component of bond purchases is the carbon footprint of issuers. Another issue could be the cooperation of monetary and fiscal policy. The ECB has already announced that it will present the results of its strategic review in the fall.

Economic Indicators July 7

MEZ Country Indicator Last period
08:00 GE Industrial Production (May, m/m) -1.0%
11:00 EZ European Union Economic Forecasts
20:00 US FOMC Minutes

 

Earnings Calender July 13

Country Company Period
AUT Telekom Austria Q2 
US JPMorgan Chase Q2
US Goldman Sachs Q2
US PepsiCo Q2

 

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, +41 44 250 78 59, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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