Global equities faced a challenging start to August, with the S&P 500 dropping over 6% in the first three trading days and the Magnificent Seven falling nearly 10% in the first week. However, despite the initial downturn, the market rebounded sharply, resulting in another positive month for global equities, with the MSCI World Index rising 2.7% month-over-month (MoM) and ending August up 17% year-to-date (YTD).
The initial risk aversion was driven by weak US employment data, as the unemployment rate unexpectedly rose to 4.3%, marking a 0.5% increase over three months — an early warning sign that has often preceded past US recessions. Simultaneously, the Bank of Japan's rate hike and hawkish stance led to an unwinding of yen based carry trades, contributing to a global equity sell-off and a spike in volatility (VIX).
South African (SA) equities continued their strong post-election run, with the FTSE JSE All Share Index surpassing another significant level last month, breaking above 84,000 on 21 August and reaching a record high of 84,553.5 on 27 August before pulling back to close the month at 83,749.86 month-over-month (MoM).
The S&P GSCI Index registered a modest decline in August. Energy and livestock were the weakest components of the index, while agriculture, industrial metals and precious metals achieved modest price gains. Within energy, all sub-components ended the month in negative territory.
Cryptocurrencies were not immune to the wave of volatility in early August with certain tokens falling by more than 30% in a single day. While much of the sell-off was subsequently reversed, August nevertheless proved to be a challenging month for the asset class, with Bitcoin down nearly 9% and Ethereum down 22%.
US MARKETS
US shares ended higher in August but the month began with extreme market volatility and some sharp stock market falls. The market volatility was in part sparked by July's weak ISM Manufacturing Index, minimal payroll increases, and rising unemployment fuelled recession fears. Conversely, Global bonds rallied, with the Bloomberg Global Aggregate Index rising 2.8% for the month. Other interest rate-sensitive assets, such as real estate, also saw strong performance, with the Global REITs Index up 6.2% m/m.
The stock market volatility abated and investors looked ahead to a speech by Fed chair Jerome Powell at the Jackson Hole central bank symposium towards the end of August where he signalled that the Fed is gearing up for a series of interest rate cuts, stating, ‘The time has come for policy to adjust’. He emphasised that while the direction toward rate cuts is clear, the timing and pace will be guided by upcoming economic data.
The S&P 500 ended the month higher with consumer staples, real estate and healthcare among the top performing sectors.
EUROZONE/ UK MARKETS
In Europe, the boost to the French service sector from the Olympics pushed the eurozone composite PMI (Purchasing Managers' Index) higher than expected. However, the overall economic backdrop remained weak and earnings from cyclical companies disappointed. Eurozone inflation slowed to a three-year low in August, however, services inflation, closely monitored by the ECB, rose. The Euro Stoxx 50 ended up 1.8% m/m. The war in Ukraine also returned to the headlines, with Ukraine launching a surprise incursion into Russia’s Kursk region.
The UK stock market recorded a small advance, with the blue-chip FTSE-100 up 0.1% in August. The healthcare, consumer staples and industrials sectors were the top contributors over the period.
The Bank of England’s (BoE) Monetary Policy Committee (MPC) implemented its first rate cut in four years, lowering the Bank Rate by 25 basis points to 5.00%. However, caution over additional rate cuts led to a rise in the value of sterling against the dollar and the euro.
JAPAN
On 5 August, the Nikkei 225 stock market index recorded its largest decline in history in terms of index points. This decline surpassed the magnitude of the Black Monday crash in 1987. In percentage terms, the 12.4% drop was the second-largest single-day decline on record. The market sharply rebounded (+10.2%) on the following day, 6 August.
EMERGING MARKETS
Emerging market equities were not spared from the volatility that rocked global markets in August, compounded by an unwinding of the carry trades, given its heavy skew to information technology. Notwithstanding, the MSCI Emerging Market Index did manage to end the month up 1.4% in US dollar terms.
Regionally, Asia capped off a fourth straight month of gains on the back of growing hopes of a soft landing for the US economy and looming interest rate cuts. Latin America narrowed the performance gap to EM peers on strong performance from Brazil. Chinese equities held their ground despite continued bearish sentiment amid a challenging economic recovery and investor appetite for more stimulus.
LOCAL MARKETS
On the local front, optimism towards the South African economy gained further momentum, which saw the rand surge nearly 4% against the US dollar. The latest local inflation data also boosted the prospect of the SA Reserve Bank (SARB) following the anticipated rate-cutting cycle of its major global central bank peers. SA core inflation rose 4.3% YoY in July, below the midpoint of the SARB’s target range and consensus economist expectations – both at 4.5% YoY. Markets are pricing in a potential 65 basis points cut in interest rates by yearend, from the current level of 8.25%. The Monetary Policy Committee’s next decisions are set for September 19 and November 21.
To date, the rand has averaged R18.14/USD for Quarter 3, and is expected to average R18.00/USD this quarter, with volatility on US data prints ongoing affecting the rand.
Credits: Strategic IQ, Ninety One, Investec, Bloomberg
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