By Jan Faure
August was an eventful month for global markets, beginning with a dramatic sell-off across equity markets following the release of disappointing US economic data and a bigger-than-expected hike in interest rates by the Bank of Japan (BOJ). Fears of a recession in the US, and a reversal of the yen carry trade, sent shockwaves throughout global financial markets.
A weaker-than-expected US jobs report on Friday the 2nd August raised concerns about a slowing US economy. US payrolls data came in well below forecast, while the unemployment rate unexpectedly climbed to 4.3%, the highest since October 2021. Investors panicked that the Federal Reserve could be behind the curve with monetary policy easing, sending investors into the safety of bonds. Global equities fell sharply the following Monday, with the S&P 500 and Nasdaq Composite declining by 3% and 3.4% respectively on the day.
Japan’s Nikkei 225 index plunged 12.4% on Monday the 5th, its biggest single-day decline since 1987. The BoJ’s decision to hike interest rates to 0.25% (accompanied by a hawkish tone) caused the yen to spike in value. This move disrupted the long-standing “carry trade” investment strategy, whereby international investors borrow yen at low interest rates and buy riskier, higher-yielding assets such as US treasuries. As the yen appreciated against the US dollar, many investors were forced to unwind these carry trades, leading to a further spike in the yen and a sharp drop in the currency sensitive Japanese stock market.
Following a speech by Fed chair Jerome Powell at the Jackson Hole economic symposium, markets began to recover as they priced in more aggressive policy easing by the Federal Reserve. Powell signalled that interest rate cuts are imminent and noted that the US labour market has cooled significantly, and inflation is converging towards its target. At the same time, recent economic data (retail sales and GDP data) does not suggest an imminent economic slowdown (or recession) in the US.
The S&P 500 ended the month 2.3% firmer (+18.4% YTD) while the tech-heavy Nasdaq advanced by 0.6%. Japan’s Nikkei 225 recovered to end the month 1.2% lower (+15.5% YTD). In Europe, the Euro Stoxx 50 gained 1.7% while the UK’s FTSE 100 edged 0.1% higher.
US inflation data for July reinforced the trend of easing price pressures. Headline Inflation (CPI) eased to 2.9% YoY in July, the first time since 2021 that headline inflation has been below 3%. Against this backdrop, global bonds and real estate rallied as cooling inflation bolstered the case for more aggressive rate cuts. The Bloomberg Global Aggregate Bond index ended the month up 2.8% while the S&P Global REIT index gained 6.2%.
In China, the CSI 300 index declined by 3.5% as economic data continues to reveal waning economic growth, declining home prices, and an increase in unemployment. Economic weakness in China is negatively impacting commodities – iron prices dropped to a two-year low on the back of the real estate crisis. So far, weak economic data has not been met with sufficient government stimulus needed to boost consumer demand and investor confidence.
Overall, August was a highly volatile month that ended positively for investors. Interest rate sensitive assets gained most as slowing inflation and a cooling US labour market affirmed that September will very likely be the beginning of the Fed’s rate cutting cycle. Risks are however elevated as economic data is scrutinised to gauge if the Fed has won the war on inflation while managing to steer the US economy away from recession.
Table 1: Global Indicators – Local reporting currencies
