August was an eventful month for markets. Fears about a US recession as a result of disappointing US economic data, together with an interest rate hike by the Bank of Japan, led to volatility and a sharp sell-off across global equity markets earlier in the month. Concerns about the economic outlook led investors to discount more aggressive interest rate cuts from major central banks. The prospect of lower US interest rates in the coming months helped equity markets rebound in the second half of August and other interest rate sensitive assets classes, such as global government bonds and real estate, were supported. Weaker global growth and manufacturing momentum weighed on commodity markets.
In the US, manufacturing data came in well below expectations and a weak July jobs report caused concern among investors however the equity market sell-off was short lived. After the initial spike in volatility, the prospect of lower interest rates provided comfort along with a solid Q2 earnings season that showed few signs of an imminent economic slowdown. This allowed most markets to recover their losses by the middle of the month. The S&P 500 Index continued to outperform other markets in August, benefiting from a broadening of earnings growth outside of the technology sector.
European equities underperformed the US in local currency terms. The overall economic backdrop remained weak and earnings from cyclical companies disappointed.
In the UK, progress in the FTSE 100 was hampered by a stronger pound, as well as weak performance among commodity stocks on growth concerns. However, it still moved close to all-time highs by the month end. Meanwhile, smaller and medium-sized company stocks were also impacted by investors’ aversion to economically sensitive areas.
Following its strong performance over the last couple of months, the Japanese TOPIX Index was the weakest performing market in August. The Bank of Japan’s decision to increase its policy rate and hawkish tone led to an abrupt unwinding of carry trade positions, which had relied on cheap Japanese yen borrowing costs to buy other higher yielding assets. Japanese government bonds rallied as demand increased from domestic investors.
Asia ex-Japan and emerging market equities performed well during the month as expectations for US interest rate cuts weighed on the US dollar. This also supported emerging market bonds.
Within the developed sovereign bond market, US Treasuries outperformed other markets as investors now expect the US Federal Reserve (Fed) to cut rates more aggressively than the European Central Bank in the coming months. Global credit markets performed well, with a stable corporate earnings outlook continuing to support the asset class. The flight to quality helped global investment grade bonds come out as the best performing sector during the month while high yield bonds lagged.
Notwithstanding the volatility during August, equity and fixed income markets provided positive returns. Fixed income provided protection during the sell-off at the beginning of the month because of the income yield buffer, while equities later recovered on US interest rate cut expectations. Investors and strategists are divided on the likelihood of recession in the US and markets are likely to be sensitive to economic data releases and the clues provided about the path of US interest rates. However, GDP growth is slowing, and inflation is declining. The Fed is expected to deliver several interest rate cuts this year, starting in September. Any further weakening of the US labour market might though warrant a more aggressive policy response. Falling US bond yields should support equities going forward provided the earnings outlook remains stable. Defensives and modestly priced quality stocks appear attractive in a slowing growth backdrop. Current yields on high quality fixed income remain attractive and should prove resilient against volatility and a negative growth shock. Furthermore, international diversification within portfolios can mitigate the risk of a weaker US dollar.
Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk
This 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.
This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.
Strictly Necessary Cookies
Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings.
If you disable this cookie, we will not be able to save your preferences. This means that every time you visit this website you will need to enable or disable cookies again.
