Pressures mount on global risk appetite, but will the sell off last?

Get our take on what to expect this week, and why tech could come under selling pressure

What a difference a week makes. Last week no one would have thought that US consumer sentiment would have fallen sharply to its lowest level since 2011 and that the Taliban would have toppled all major cities and taken control in Afghanistan, causing US and UK ambassadors to flee to the safety of the airport. Some of the “bad news” that has weighed on markets this morning include some expected developments, for example weaker Chinese data, which is most likely a reaction to more lockdowns to contain rising Covid infection rates. Stock markets are down across the board, the S&P 500 is expected to open down some 0.3%, however, the torrent of “bad” news needs to be balanced out with the “good”, including President Biden’s infrastructure spending programme and the fall in US treasury yields, the 10-year yield fell 6 basis points on Friday after the University of Michigan US consumer sentiment survey, and they continue to fall at the start of a new week, which could temper some expectation of a hawkish move from the Federal Reserve at next week’s Jackson Hole central banker’s conference.

Why we can’t price in geopolitical concerns in Afghanistan with certainty just yet

The geopolitical uncertainty created by the Taliban’s takeover of Afghanistan and the West’s seemingly indifference or inability to stop the Taliban is unsurprisingly weighing on market sentiment today. However, the truth is that after being repressed for 20 years, we have no idea what the Taliban will represent or do in Afghanistan now that they have taken control once more. The risk is that international terrorism is back on the agenda, however, it’s too early to tell if that will be the case, we will have to wait and see what the Taliban do in their first days and weeks of power before financial markets can figure out how to process this latest geopolitical development. However, the unknown is a frightening place for investors, so we could see a rise in volatility and a dip in market sentiment as we progress through the week.

Oatly knocks revenue expectations out of the ballpark

That doesn’t mean that there won’t be pockets of positive performance as it is the tail end of Q2 earnings season and market sentiment is not yet so bad that it doesn’t reward companies that are doing well. For example, Otaly, the oat milk company, reported a 53% rise in Q2 revenues and forecast full year revenues above expectations, at more than $690mn for 2021. The market doesn’t seem to mind that gross profit margin fell from 32% to 26% as this news was balanced out by news that the company’s second plant, currently under construction in Asia, will be opening later this year. Its stock price is up some 6% so far on Monday after a fairly rough summer that saw sharp declines for this stock.

China’s growth slowdown is bad news for the FTSE 100

In the FTSE 100 there have been some sharp falls for Burberry and the oil producers including BP and Shell, as these companies are most sensitive to a slowdown in China. We expect commodity prices to remain under pressure this week, Brent crude oil has fallen more than 2% at the start of this week. This is also impacting the commodity FX space, AUD/USD is down 0.5% on Monday and is at its lowest level since November 2020. The winners in global stock markets at the start of this week include defensive stocks such as Coca Cola, up more than 1.5% at the start of this week, along with London Stock Exchange Group, which is also benefitting from another big listing taking place in London after Olam Group, the food producer, said that it would list its shares in London by the first half of 2022. We expect to see defensive stocks perform best in the current environment, with stocks linked to the global economic recovery struggling. Interestingly, the Nasdaq is down sharply today, with Apple and Amazon failing to deliver traditional safe haven benefits. Apple is down 0.5% so far on Monday, which is a sign that there is some investor nervousness about the slowdown in China hurting big tech. Overall, if we see sharp declines in the US indices on Monday, we will then expect Asia and Europe to follow suit.

Fed minutes and US retail sales key market drivers this week

Elsewhere, the market will also be watching the minutes from the Federal Reserve’s July meeting closely to see if it offers any more clues on when financial markets should expect the US central bank to start withdrawing support and tapering asset purchases. After last week’s collapse in consumer confidence, the market will focus on Tuesday’s US retail sales report. The market is expecting a 0.2% decline over the month, however if sales fall further due to the rapid spread of coronavirus and major supply chain issues in auto-production, then market sentiment could take another dip as the prospect of a simultaneous slowdown in the US and China could trigger serious concerns about the outlook for global growth this year. The good news is that the Delta wave of Covid infections tends to last approx. 2 months, based on the UK’s experience, and is less deadly among the vaccinated, thus, demand could be pushed into Q4 rather than be eroded all together. The risk for the service industry in the US is that people are “self-policing” in the face of rising coronavirus cases. If we see a notable decline in spending on leisure activities, restaurants and travel then general market risk sentiment is likely to remain under pressure for some time with defensive stocks, the dollar and gold the likely beneficiaries.