Head of FX Strategy
Summary: Market performance in August lived up to its seasonal fears, with both equities and bonds declining in tandem. Stocks were in red across the regions with declines being led by emerging markets as higher bond yields and weak China sentiment underpinned. Focus turns back to central bank policies as the quiet European summer months come to an end.
Global equities reversed some of the gains of the last two months, sliding by 2.6% in August. Higher Treasury yields weighed on equities, while China sentiment continued to weaken as economic data remained lacklustre and stimulus measures underwhelmed. The AI hype is also starting to deflate, despite another blockbuster earnings from Nvidia.
US -1.8%.
The US equity benchmark index, the S&P 500, was down 1.8% in August but remained a regional outperformer. Earlier in the month, growth and inflation indicators brought a hawkish shift in Fed expectations weighed on US equities. However, there are concerns of weakness in consumer spending later in the year as Fed’s tightening filters through to the economy. There are also some early signs of cracks in labor markets, but bad news has been good news lately as Fed is expected to stay on pause and this helped US stocks to recover some of their losses into the end of the month.
Europe -2.7%.
The European index, MSCI Europe, underperformed the US benchmark index in August as it closed down 2.7%. Economic concerns remained front-and-centre, with core inflation remaining sticky while economic slowdown, especially in Germany, continued to complicate the path ahead for the European Central Bank.
Asia -5.1% and Emerging Markets -6.3%.
Asia and emerging markets were the underperformers in August, declining by over 5% and 6% respectively. Several headwinds underpinned, but most prominent were the bearish outcomes in China and Hong Kong with concerns over property sector and shadow banking. The start of the rate cut cycles in Latin American countries like Chile and Brazil could not provide much of a tailwind as Fed’s higher-for-longer message continued to limit the room for easing in emerging markets.
Energy sector led in the global market in terms of August performance once again, but with modest gains of 1.2% while all the other sectors were in the red. Gains in oil prices underpinned, driven by sustained supply tightness concerns. Healthcare was the second-best performing sector, posting a decline of 0.9%, while Communication Services were down over 1.5%.
Bonds outperformed equities in August, although overall performance was still in negative territory. This was again a reflection of the confusion over how much more central banks can hike rates from here, while a fresh rush of Treasury supply also underpinned. Corporate bonds, however, underperformed global Treasuries.
Sources: Bloomberg and Saxo
Global equities are measured using the MSCI World Index. Equity regions are measured using the S&P 500 (US) and the MSCI indices Europe, AC Asia Pacific, and EM respectively. Equity sectors are measured using the MSCI World/Sector] indices, e.g., MSCI World/Energy. Bonds are measured using the USD hedged Bloomberg Aggregate Total Return indices for total, sovereign, and corporate respectively. Global Commodities are measured using the Bloomberg Commodity Index. Oil is measured using the next consecutive month’s WTI Crude oil futures contract (Generic 1st CL Future). Gold is measured using the gold spot dollar price per ounce. The US Dollar currency spot is measured using the Dollar Index Spot, measuring it against a weighted basket of the following currencies: EUR, JPY, GBP, CAD, SEK, and CHF. Unless otherwise specified, figures are in local currencies.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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