Overall Market Backdrop for August
- Developed markets struggled in August as they continue to battle against high inflation, monetary tightening and lower growth expectations. Markets also expected a less hawkish stance from central banks and were taken by surprise by Central banks’ commitment to bringing inflation under control, despite the inherent risks to the growth outlook.
- The US 10-Year Treasury yields saw a change in trend and dropped by 33 basis points, ending at 2.64%.
- Momentum was the best performing factor for August, returning 1.91%.
Drivers of Market Conditions in August
- The start of the month saw the Fed retreating from its less hawkish tone and this caused a reversal of risk sentiment. While early on in the month there was some relief with inflation data coming back slightly lower than expectations, some thought that the fed may moderate its pace of monetary policy tightening. While a stream of strong economic data poured into the US with several large retailers reporting resilient earnings, this did not stop the S&P 500 from contracting due to the FOMC’s meeting implying weaker economic growth should be expected. The highly anticipated Jackson Hole Symposium – an annual conference exclusive to prominent central bankers and finance ministers to discuss important and current global policy matters signalled higher interest rates in an attempt to try and further curb inflation.
- The Federal Open Market Committee (FOMC) minutes highlighted that economic growth would be considerably weaker due to the tighter financial conditions set to come. The committee believes that the effects of tightening have not yet been fully translated into the real economy. The committee also acknowledged that there would have to be more than just supply chain improvements to combat the ever-present inflation issue.
- The Jackson Hole Symposium wiped out $1.24tn in market cap for the S&P 500 following Chair Powell’s comments that may have been interpreted as decisively hawkish, ending most speculation of a near-term policy pivot.
- While European inflation prints weren’t eye-pleasing, they were in line with expectations which meant the first-week European markets had a more muted response to inflation data. European equities did come under some distress during the mid-month period, with a higher than expected UK inflation print and cost of living concerns amongst consumers. Europe also saw it’s fair share of economic data that put downward pressure on equities; slowing factory output fed into recession fears. The month also ended with a new record-high inflation print. In all, the level of uncertainty about economic growth remains especially elevated in Europe. In addition, the 6-month Ukraine war is showing no sign of a ceasefire, and the chances of a winter recession remain high as the region’s energy crisis continues to intensify.
- In the UK we saw the Bank of England increase the bank rate by 50 basis points after a convincing 8 votes to 1. This comes as a result off the back of elevated domestic price pressures and a tight labour market.
- Markets have continued to see increased volatility from a combination of factors like growth uncertainty, tighter labour market, and elevated inflation.
- Global Sovereign yields increased throughout the month. The driving factor at the start of the month may have come from positive economic data easing fears of recession fears. The FOMC meeting continued the theme of taming inflation while also acknowledging the risk of over-tightening and this caused yields to rise higher. This was followed by the Jackson Hole Symposium which once again led towards a more hawkish stance, this caused the Treasury yield spread (10Year-2Year) to further invert to -0.37%.
- Emerging markets faired well in August even though Chinese equities were disappointing. China was one of the many countries impacted by severe weather conditions. To support the economy, the Chinese central bank (People’s Bank of China (PBoC)) eased monetary policy further in combination with China’s State Council (chaired by Premier Li Keqiang) announcing new measures worth 1 trillion yuan.
How did Factors Perform in August?
- Momentum was the best performing factor in August after having a rough time YTD. Momentum stocks were considerably saturated to Quality stocks but after the great performances from Value and Minimum Volatility stocks, the factor is now beginning to pick up these factors which is a reason for its performance in August. Constant volatility and downward equity pressures have made Minimunum Volatility stocks strive within the past few months.
- Value companies have outperformed growth and have been helped by bank rate hikes and expectations of future hikes. The energy sector which is predominantly Value companies has also been the best performing sector for the month with a return of 7.09% as they continue to pass on their inflationary pressures straight to the consumers.
Blog Post by Raj Chana
Investment Analyst at ebi Portfolios.
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