Monthly Comment - August 2024

August 2024 Financial Market Summary

August 2024 was a turbulent month for global financial markets, characterized by significant volatility and a series of unexpected events that impacted various asset classes. Let's examine the performance of each key asset class and the factors that influenced their movements.

Equities

The equity markets experienced a rollercoaster ride in August, with a sharp sell-off at the beginning of the month followed by a strong recovery. The MSCI All Country World Index initially plummeted but rebounded to set all-time highs by month-end, finishing with a 2.5% gain. This volatility was primarily triggered by disappointing US jobs data and a surprise tightening move by the Bank of Japan, which led to a massive unwinding of the yen carry trade. In the US, the S&P 500 ended the month up 2.4%, despite early turbulence. The tech sector, which had been leading the market, experienced a brief retreat before recovering. Notable company news included strong earnings reports from major retailers, which helped ease concerns about an imminent recession. European equities outperformed, with the MSCI Continental Europe ex. Switzerland index rising 4.0%. This performance came despite disappointing economic data from the region, particularly in the manufacturing sector. Japanese equities were the worst performers among major markets, with the MSCI Japan index gaining only 0.5% for the month. The market experienced extreme volatility, including a 20% drop over three days early in the month, following the Bank of Japan's policy shift.

Bonds and Interest Rates

The bond market saw significant movements in August, influenced by central bank actions and economic data. Global government bonds returned 1.0% in USD hedged terms. The US 10-year Treasury yield ended the month at 3.90%, with yields initially falling sharply before recovering somewhat. The yield curve briefly uninverted, reflecting changing expectations about the economic outlook and monetary policy. In a pivotal development, Federal Reserve Chair Jerome Powell delivered a dovish message at the Jackson Hole symposium, signaling a likely start to the easing cycle in September. This shift in stance came after a third consecutive downside surprise in monthly headline inflation, allowing the Fed to focus more on labor market risks. European bond yields also fell, with the German 10-year yield ending at 2.30%. The European Central Bank maintained its hawkish stance, but weakening economic data raised questions about future policy direction.

Currencies

The currency markets were particularly volatile in August, with significant movements in major pairs. The US Dollar weakened overall by 1.2%. This weakness was partly due to changing expectations about Fed policy and concerns about US economic growth. The Japanese Yen saw a dramatic appreciation early in the month following the Bank of Japan's policy shift, causing significant disruption in global markets. This move unwound many carry trades, where investors had borrowed in low-yielding yen to invest in higher-yielding assets elsewhere.

Commodities

Gold prices reached new highs in US Dollar terms during August. The precious metal benefited from its safe-haven status during the period of market turbulence and was supported by the weaker US Dollar. Oil prices remained relatively rangebound despite ongoing tensions in the Middle East. Brent crude stayed below $90 per barrel, with expectations of OPEC+ dialing back production cuts in the coming quarters keeping a lid on prices. Copper prices were volatile but ended the month higher, supported by hopes of Chinese stimulus measures and concerns about supply disruptions in some producing countries.

Economic Indicators

US economic data were mixed in August. While the initial jobs report disappointed, subsequent labor-related data did not corroborate the weakness. Retail sales data and corporate earnings reports were generally strong, easing immediate recession concerns. Inflation continued its downward trend, with the US seeing a third consecutive downside surprise in monthly headline inflation. This development allowed the Federal Reserve to shift its focus more towards labor market risks. In Europe, economic indicators were generally disappointing, particularly in the manufacturing sector. This raised concerns about the region's growth prospects and the potential impact of tight monetary policy. Japan’s economic data were overshadowed by the Bank of Japan's policy shift, which had far-reaching effects on global markets.

Outlook for September 2024

As we enter September, markets face a critical period. The US economy is entering a window where the labor market must hold up before the effects of expected rate cuts can provide a cushion for growth. While recent developments have been positive, there is little margin for error at current equity valuations if economic growth deteriorates faster than expected. The upcoming US presidential election adds another layer of uncertainty, as equity performance has historically been poor in the months leading up to elections. Additionally, ongoing geopolitical tensions in the Middle East and Ukraine continue to pose risks to market stability. Investors will be closely watching for signs of economic slowdown, particularly in the US labor market, and any shifts in central bank policies. The interplay between monetary policy decisions, economic data, and market reactions will likely drive asset performance in the coming month.