César Pérez Ruiz, Head of Investments & CIO Pictet Wealth Management

News out of China has preoccupied investors of late. Following the Chinese regulator’s crackdown on domestic tech companies, which sent ride-hailing app Didi’s shares plummeting shortly after its US IPO, we expect more regulation ahead. Data protection will be a particularly key issue, especially among Chinese companies with plans to list in the US. Chinese macroeconomic data released last week were mixed. Possibly seeking to avoid disorderly liquidity tightening, the People’s Bank of China took the market by surprise by cutting banks’ reserve ratio requirements.

Meanwhile, the European Central Bank (ECB) concluded its strategy review earlier than expected, with some important changes but no major surprises. The ECB will now have a symmetric inflation target of 2% and temporary tolerance for a moderate inflation overshoot, as opposed to “close to but just below 2%”. The central bank will also gradually include housing costs in its main consumer price basket (HICP) and incorporate climate risks into its monetary policy from 2024 on.

US Treasury price action remained the main driver across many asset classes last week. The 10-year yield dropped to as low as 1.25% on Thursday (before rising again) and the yield curve flattened further. The question remains whether recent Treasury repricing is driven by fundamentals (i.e., growth concerns, including following a weaker-than expected June ISM non-manufacturing index) or technicals (supply and demand) and positioning.

Growth concerns make emerging-market (EM) equities especially vulnerable, given that EMs are lagging in the global vaccination race. We prefer DM over EM equities. As some countries reopen, football stadiums filled to watch Italy eventually score the winning goal in the Euro 2020 final. In DM equities, companies with weak balance sheets have corrected most, reinforcing our caution about companies with weak cash flows.

This week, we will have important news on inflation, with the June US consumer price index release telling us if recent price rises are being sustained. Going into the Q1 reporting season, expectations were for year-over-year growth in earnings of the order of 26% for S&P 500 companies. In the event, Q1 earnings grew 46%.

But with the Q2 earnings season beginning this week, expectations are that Q2 earnings growth will touch 60% year on year—a high target that suggests positive surprises could be harder to come by. Strong reporting will be needed to sustain market momentum.