World Market Summary
Markets were unsettled at the start of the month leading to the volatility index, the VIX, having its largest ever intraday increase on the day coined “Black Monday.”
The unrest started on the last trading day of July, with the Bank of Japan (BoJ) announcing an interest rate increase; at the same time, US jobs data came in much weaker than anticipated. This led some to speculate on a worse than previously anticipated US recession, and as a result, the market started to expect more interest rate cuts in the US. This closing of interest rate differentials led to a strengthening of the yen against the dollar and resulted in an unwinding of the Japanese carry trade (where investors had been taking advantage of low borrowing costs in Japan and reinvesting those borrowed proceeds at higher rates in markets such as the US and US technology shares). US technology company earnings reports added to this uncertainty, as their earnings potential from Artificial Intelligence (AI) investments was called into question.
To put these moves into context, the Nikkei (market index for the Tokyo Stock Exchange) fell 25% peak-to-trough, darling stock Nvidia fell over 20% in a few days, and the yen rallied an unprecedented 10% against the dollar in two weeks.
To a large degree, the sell-off we saw was related to systematic and trend-following hedge funds. This combined with the usual August lull in volumes in activity expedited the sell-off we saw in the first week of the month.
Despite the correction, we believe this was mostly driven by technical forces as the underlying strength of the US economy remains. Both corporates and households remain in decent shape and there are no real signs of excess.
Technical buying, a large decline in yields, improving labour market data in the US in the form of non-farm payrolls and encouraging comments from the BoJ aided the recovery and meant that most developed markets ended the month in positive territory.
Federal Reserve (Fed) Chair Jerome Powell’s comments at the Jackson Hole economic symposium (conference where central bankers discuss economic trends) late in the month stating “The time has come for policy to adjust” was taken positively in markets and reaffirmed what most already knew.
The UK continues to remain a political safe haven for investors and is currently on the strongest growth path of the G7 group of advanced economies.
Data continues to be mixed in China but there were some encouraging signs on the geopolitical front, as President Xi had productive discussions with the US National Security advisor.
Elsewhere, in commodity markets gold was once again up as it has continued to price in a cutting cycle and is now up 25% since late February.
Sterling again strengthened against the dollar and now sits at a healthy £1.31 per dollar.
Our in-depth views on:
Our weightings are based on sterling as a base currency.
United Kingdom
August started with a bang as the UK market was caught up in the global market sell-off. The FTSE 100 and FTSE 250 fell over 5% in the initial days of the month before more reassuring data and rate cut rhetoric from across the pond calmed the nerves, and the FTSE 100 maintained its impressive run, rising a modest 0.87% whilst the FTSE 250 eased back 1.96%.
At the August meeting of the monetary policy committee, the Bank of England (BoE) cut interest rates by 0.25% to 5%, the first cut since March 2020. The market is anticipating one further cut by the year-end. Since the rate cut, Rightmove showed house purchasing enquiries rising 19% from August 2023 and the number of listings for sale hit a seven-year high. In a further show of market optimism, mortgage approvals hit a two-year high in July.
Inflation for the 12 months to the end of July rose 2.2% but this came in below consensus and encouragingly services inflation cooled further. Wage growth now comfortably exceeds inflation in a welcome boost for consumers, although this may be the one data point stopping the BoE from cutting rates more aggressively.
The UK economy continues to defy expectations. In January 2024, the International Monetary Fund (IMF) forecasted 0.6% growth for 2024 and in May the Organisation for Economic Co-operation and Development (OECD) forecasted just 0.4% for this year. After 0.7% growth for the first quarter, second quarter Gross Domestic Product (GDP) came in at 0.6% meaning the UK recorded the strongest growth of the G7 group of advanced economies. The Treasury has now updated its own forecasts to suggest UK GDP growth will come in around 1.1% for 2024 far higher than those original forecasts. The latest set of Purchasing Managers Index (PMI) data also showed solid output growth in services and manufacturing sectors with activity rising above consensus. In a sign of confidence in the UK, sterling strengthened against the dollar and euro through the month.
United States
All major US indices ended August in positive territory, recovering strongly from “Black Monday”. The sell-off was initially driven by recession fears following weak July payrolls data and turmoil in Japan. However, markets quickly rebounded, fuelled by easing inflation, strong retail sales, and clear signals from the Federal Reserve about imminent rate cuts, with a total of 100 basis points in cuts now expected by investors before the end of the year. By the end of the month, the S&P 500 gained 2.43%, the Nasdaq rose 1.18% while the Russell was flat.
US economic data supports the outlook for a soft landing, with little evidence pointing towards a recession. Inflation showed more signs of easing, falling to 2.9% which is the lowest in over three years, while core inflation (excludes food and energy) came in at 3.2%, the lowest since April 2021. Despite some signs of financial stress among consumers, job growth remains strong. The unemployment rates rise to 4.3% although concerning, was affected by some one-off factors such as hurricane disruptions. Elsewhere, the commerce department revised Q2 2024 GDP growth upward to 3%, largely due to a substantial revision in consumer spending. Retail sales also surged 1% in July, marking their best performance in 18 months, highlighting the resilience of the US consumer. While the S&P Global PMI showed that manufacturing remains in a slump, the larger services sector continues to expand at a healthy pace.
Looking ahead, we expect US equity market breadth to improve as earnings growth broadens beyond the tech sector and as the rapid growth of AI stocks stabilises. With relatively robust economic fundamentals, easing inflation, and anticipated rate cuts, we remain positive on US small and mid-caps, which are well-positioned to benefit from improving profitability.
Europe
August has been a good month for European equities, with both the CAC 40 and DAX up over 2.5% as rate cut hopes continue to fuel optimism and the healthcare sector hit its record high.
The struggle endures in Germany as growth contracted in Q2, retail sales shrank by 1.2% whilst the German market researcher GfK Consumer climate indicator dropped to the lowest reading since May. The ZEW Indicator of Economic Sentiment plunged, coming in well below market expectations, leading the ZEW president to earnestly state, ‘The economic outlook for Germany is breaking down.’
Other European countries, relatively speaking, seem to be performing better, albeit there remains a lingering malaise and discussions are ongoing in Brussels over new initiatives to deliver fiscal stimulus to boost the European economy. Economic sentiment in the Euro area rose to the highest level in over a year and firmly above market expectations, whilst inflation in the Euro Area rose to 2.6%, in line with expectations. Conversely, manufacturing has continued to decline in August due to a sizeable reduction in new orders.
In France, there is renewed focus on politics following the close of the Olympics. Macron’s rejection of left wing PM candidate Lucie Castets has caused some friction within the coalition and whilst the coalition remains robust for the time being, it is difficult to see where a compromise will occur looking ahead. We continue to expect volatility in French markets as political events continue to unfold.
Asia and Emerging Markets
At the close of play, August produced a positive month for Asia and Emerging Markets, with the MSCI AC Asia ex Japan Index up 1.98%. However, that masks a 25% correction at the start of the month in the Japanese Nikkei and resulting sell-off in other Asian markets, on the back of the carry trade unwind as mentioned above. Markets recovered as the month went on.
Brazil was a notable strong performer up 6.54% while the Hong Kong technology led index, the Hang Seng, was up 3.7%, led by a rally in semiconductor names on the back of impressive earnings results. Chinese shares were also boosted late in the month on rumours that the Chinese government may allow homeowners to refinance their mortgages at lower rates.
On the geopolitical front, there was a productive meeting between President Xi and the US National security advisor with the former committing to a stable relationship with the US. This is expected to lay the groundwork for a visit from President Biden before his term is out.
Fixed Income
It was a volatile but positive month for fixed income with the majority of asset classes delivering positive returns. Emerging Market corporates led the way up 1.8%, followed by global high yield and other developed market corporates. Encouragingly, the diversification offered by fixed income when equity markets fall, now looks to be reinstated, after collapsing in 2022.
As mentioned above, weaker jobs data, concerns of a worse than previously anticipated US recession and the unwinding of the carry trade in Japan led to falls in yields in the first few days of the month. A recovery ensued thereafter, and we did indeed get a bull steeping, where yields at the short end of the curve fall by more than yields at the long end of the curve, in the US.
The BoJ, after raising rates at their last meeting, helped restore some calm to markets by communicating that they would not plan further policy tightening during periods of substantial volatility. The Japanese yen was volatile in the month but tested the highs again by month end.
Fed Chair Jerome Powell made it very clear that we are now entering a period of US interest rate cuts at the Jackson Hole Symposium late in the month. This was already widely known by investors with most investors now expecting a 25-50 basis points cut at the September meeting. Interest rate markets are now priced for 225 basis points of a cutting cycle through to the end of 2025. Assuming we avoid a US hard landing as is our base case, market pricing may have gotten slightly ahead of itself.
Finally, the Chinese central bank intervened in the bond market and bought government bonds worth $56.3 billion in its first such bond purchase in nearly two years. They did this in order to stop a rally in bonds that had led to inflated prices and low yields, at the same time as banks and investors are seeking safe haven assets.
Alternatives
Once again the performance of gold and oil diverged, with gold continuing its strong uptrend over the course of the month, rising 4.32% as Brent oil fell a similar 4.84%. Dovish comments from Fed Chair Powell at Jackson Hole provided a further leg down in real yields, which was supportive for gold given that real yields represent the opportunity cost of holding the precious metal. This has provided a further tailwind in the shape of weakness in the dollar, which is gold’s safe haven rival. A further ramp up in geopolitical tensions or Chinese central bank purchases could extend the current rally, but risks appear slightly tilted to the downside given the current optimism in rate cut expectations. Should rate cut expectations be priced out, the opportunity cost of gold rises once more and the uptrend could come to an end. Oil and gold have tended to move in tandem historically and the weakness in ‘Black gold’ could provide another catalyst for a correction in gold.
Weakness in oil continues to result from the lull in Chinese demand amidst the economic downturn and electric vehicle ramp up. However, there remains plenty of support for the price going forward. Organization of the Petroleum Exporting Countries (OPEC+) continue to maintain supply discipline, US inventories have contracted in eight of the last nine weeks and Libya outages have threatened to take a further one million barrels a day off the market. Further, there remains the unfortunate possibility of a broadening of the Middle Eastern conflict, with the outstanding Iranian promise to respond to the assassination of the former Hamas leader. On the demand side, after the weak manufacturing and labour market data that caused the market shock, US economic data has held up relatively well and oil demand will remain strong in a soft landing scenario.
Property
As bond yields have come down, so too have mortgage rates with US 30-year mortgage rates drifting below 6.5%, the lowest since the early months of 2023. This has been conducive to healthier housing market activity and pickup in mortgage applications. A similar trend has been in motion in the UK, with mortgage approvals rising to the highest levels since 2022 and annual house price growth consequently accelerating from 2.1% to 2.4% in August, according to Nationwide. This was the fastest pace of growth since December 2022 and encouragingly construction sector optimism continues to improve amidst the anticipated government planning reforms. The overarching trend is one of improving affordability in both the UK and US, but there could be a temporary rebound in mortgage rates given the current optimism surrounding rate cuts in the US.
In China, the property market remains under pressure and the latest poll from Reuters suggests a continuation of the house price declines well into next year. The weakness in the iron ore prices and oil is reflective of the ongoing pessimism towards housing demand in China. However, late in the month it was leaded in the press that the Chinese authorities may allow existing mortgage holders to refinance at lower rates. We view this as an encouraging step forward if it were to ensue.