MARKET COMMENTARY – SEPTEMBER 2023

Markets were volatile in August. Despite the relative strength of the US economy, equities lost momentum in August as bond yields rose due to uncertainty over interest rates as a result of strong inflation data while volatility supported the US dollar. Weak macroeconomic data and property market concerns in China weighed on emerging market equities. In commodity markets, global oil prices remained relatively flat as growth risks in China offset the impact of production cuts and European natural gas prices increased despite reaching storage targets ahead of winter.

In the US, Fitch downgraded the government’s credit rating in early August on concerns around the government’s ability to address the growing debt burden because of the sharp political divisions, however this had little impact on markets. Yields on the 10-year US Treasury increased to 4.1% in August on the back of better-than-expected economic data in the jobs market and retail sales. Headline CPI increased slightly due to higher food and energy prices, while core CPI decelerated slightly. The Federal Reserve Bank (Fed) remains concerned about inflation and monetary policy will remain data dependent with further tightening if necessary. At the Jackson Hole symposium on 25 August, the Fed chair, Jerome Powell, noted that US inflation remained too high, although past its peak, and that interest rates could remain higher for longer. Markets are expecting one final hike from the Fed before the end of the year, followed by four or five rate cuts in 2024.

Growth in the Euro area has been relatively modest, while labour markets remain very tight and the unemployment rate dropped to its lowest level on record. However, the economic outlook remains uncertain. Eurozone headline inflation remained flat in August and core inflation fell modestly although it remains well above the European Central Bank (ECB)’s target and markets continue to price further ECB interest rate increases before the end of the year. European equities were dragged down by the banking sector after the Italian government announced a tax on banks’ excess profits. European bond yields remained broadly stable in August.

In the UK, the Bank of England (BoE) hiked interest rates by 25bps at the start of August, bringing the Bank’s Rate to 5.25%, and highlighted its intention to hold rates at restrictive levels for some time. UK headline CPI eased in line with expectations. The UK economy surprised to the upside during the second quarter of 2023 and labour market growth has been the highest on record. Taking this into account, markets expect further rate increases from the BoE this year. As a result, the 10-year gilt yield rose to 4.4% in August, while UK equities underperformed developed market peers.

Activity in China was weaker than expected with continued signs of deflation as the anticipated rebound following the lifting of draconian zero COVID measures fails to materialise. Retail sales were below expectations and any significant change to the more pessimistic outlook seems unlikely in the coming months given weak household confidence and low business confidence. Real estate has been the weakest sector this year with two of China’s largest property developers, Country Garden and Evergrande, experiencing debt problems. The People’s Bank of China lowered its interest rate twice in August aiming to address the property difficulties and deflation, but so far credit demand remains weak. Despite these measures, the Chinese Renminbi depreciated against the US dollar and equities declined.

Japan also took several initiatives to support financial markets in August, such as reducing stamp duty on stock trading. The economy expanded in the second quarter of 2023 on the back of strong net trade and this momentum is expected to continue in the coming months. Inflation in Japan has increased and Japanese equities proved relatively resilient in August compared to other developed markets.

August’s volatility highlighted concerns around higher interest rates for longer in the US while China’s economy is facing difficulties. This will inevitably have an impact on the global economy in the coming months given China contributes almost a third of global growth. While inflation pressures are easing across the major economies, risks remain and central banks will likely have to maintain restrictive policies beyond 2023. Remaining invested in a diversified portfolio focussed on high-quality equities and fixed interest securities is likely to reward investors who are willing to adopt a longer-term view.

Total returns in GBP to 31/08/2023

 *July 2023

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

The content contained in this article represents the opinions of MacIntosh & James Partners Ltd. The commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.