September Commentary
GLOBAL MARKETS
The mood music changed slightly in August - amid weaker US jobs and manufacturing data, and a rate hike in Japan, seeing an initial sell-off across equity markets before a subsequent rebound.
US MARKETS
Moved higher on evolving economic data
US equities moved higher through August, despite selling down earlier in the month following the release of a lacklustre ISM manufacturing number (46.8 vs 48.8) and a weaker July jobs report. Weaker macro data fuelled concerns about slowing US economic growth, which in turn led investors to price in more aggressive Fed ‘easing’ to come, reversing the equity market course. The best performing sectors were real estate (+5.6%) and consumer staples (+5.8%). US treasuries were positive as yields declined, and the greenback declined against most major currency pairs.
Up 2.3% (US 500)
UK MARKETS
Mixed results during a volatile month
UK stocks saw volatility in line with developed peers. Large caps carried the index return (FTSE 100), while mid and small cap constituents declined. From a sector standpoint, the best performers were in financial services (+6.4%) and industrials (+3.4%), while real estate stocks underperformed. The new UK government is set to announce a tough budget in the coming months, which may introduce further market uncertainty. Gilts were largely positive despite continued concerns over more persistent inflation and issuance. While on the currency front, sterling gained against the euro and dollar.
Down -0.3% (UK All Share)
EUROPEAN MARKETS
Moved ahead despite economic uncertainty
Both European bonds and equities traded higher through the month, but slightly underperformed developed market peers, despite inflation precipitously falling and a tailwind in economic activity resulting from the Olympics in France. The economic landscape remains more uncertain, with economic growth and manufacturing PMI’s remaining relatively weak. On the equity front, large cap companies finished ahead of mid and small caps. While within fixed income, corporate credit outperformed government issues. The euro gained against the US dollar but traded lower against sterling and the Japanese yen.
Up 1.7% (Euro 600 Index ex UK)
JAPAN MARKETS
Fell on interest rate moves
Japanese stocks and bonds declined in August, following the Bank of Japan’s decision to raise interest rates by 0.25%. The market reaction to this news was aggressive, with Japanese banks seeing their largest 1-day decline alongside the biggest 2-day fall for Japanese stocks ever, in aggregate terms. These moves led to a rally in the yen against major currency pairings, and a subsequent unwinding of a global carry trade that was in place (investors borrowing in a low-yielding yen, to invest elsewhere). Inflation remains above the central bank’s 2% target and further rate rises may be likely.
Down -2.9% (Japan Index)
Key Points
• The best performing major currency was the Japanese yen, which rebounded aggressively following weakness earlier in the year. The catalyst for recent currency strength has been the Bank of Japan’s decision to raise interest rates by 0.25%.
• Conversely, the US dollar was the poorest performing major currency through August, as investors began to anticipate a more aggressive interest rate cutting approach from the Federal Reserve, following weaker economic data.
• Both sterling and the euro gained ground against the greenback, and declined against yen strength. While the UK pound marginally appreciated versus the euro.
• Most emerging market currencies gained against a falling dollar – including the Brazilian real (+0.9%), Chinese yuan (+1.7%) and South African rand (+2.7%), with the exception being the Indian Rupee (-0.2%).
Key Points
• The bond market was broadly positive through August as inflation concerns cooled and credit spreads tightened (Bloomberg Barclays Global Aggregate Index £-Hedged +1.1%).
• The largest movements in 10-year yields were seen in the US, with a move of 13 basis points (4.03% to 3.90%), and Japan which saw a move of 16 basis points (1.06% to 0.90%).
• The best performing area of the fixed income space was emerging market debt (+2.5%), which rallied alongside a falling US dollar. High Yield credit also posted positive returns ahead of investment grade equivalents (+1.7% vs +1.1%).
• UK gilts (+0.5%) posted positive in aggregate terms but performance was more muted, as yields remained higher on the back of concerns over resilient inflation and government debt issuance levels.