Market Overview

Summary of world markets in August

A volatile August: August provided a roller-coaster ride for investors. The month started with heavy falls across global equity markets but ended with many major indices in positive territory amid renewed expectations that the US Federal Reserve (Fed) would finally move to cut its key interest rate.

Concerns over US growth: Weak US employment data  triggered a sharp decline in global share prices early in August as investors became worried about the outlook for the US economy. Meanwhile, following the Bank of Japan’s (BoJ’s) decision to increase its key interest rate in July , share prices in Japan plummeted amid an unwinding  of the yen carry trade. BoJ Governor Kazuo Ueda  subsequently warned that global financial markets “remain unstable” and second-quarter growth fuelled speculation that the BoJ might implement further monetary tightening. The Nikkei 225 Index  experienced its second-worst day since 1965  during August, but subsequently rallied to end the month 1.2% lower.

Data provides reassurance: Stronger retail sales activity in the US also provided some reassurance that the US economy was not on the brink of recession: retail sales  rose at a month-on-month rate of 1% in July. Inflationary pressures eased as the annualised rate of consumer price inflation moderated from 3%  to 2.9%  in July, representing the smallest 12-month increase since March 2021 and fuelling speculation that the Fed might cut rates in September.

A cut on the cards in the US: Expectations of monetary easing were compounded by Fed Chair Jerome Powell’s speech at the Jackson Hole symposium , in which he announced: “the time has come for policy to adjust”. Although he gave no detail on the timing or scale of any cuts, a reduction of at least 25 basis points is widely expected at the Federal Open Market Committee’s next meeting . The Dow Jones Industrial Average Index  rose by 1.8% and ended August on another high , having notched up four new closing highs over the month.

Focus on the data: Minutes from the European Central Bank’s July meeting indicated that officials intend to approach their September meeting “with an open mind” suggesting that policymakers remain amenable to another rate reduction following their 25 basis point cut  in June, although their strategy will continue to be informed by data. The Dax Index  rose by 2.2% over August.

UK share prices fall during August: Although many global equity markets successfully rebounded from sharp declines early in August, UK share prices posted a somewhat lacklustre performance amid fading hopes of further near-term cuts in interest rates. Investor sentiment was also dampened by mounting speculation over the possibility of higher taxes and spending cuts in the Labour Government’s first Budget in October. The FTSE 100 Index  edged up by 0.1% during August, while the FTSE 250 Index  declined by 2.4%.

BoE remains cautious: In a speech at the Jackson Hole symposium, Bank of England (BoE) Governor Andrew Bailey  warned that it was still “too early” to declare victory over UK inflation, saying: “We need to be cautious because the job is not completed – we are not yet back to target on a sustained basis”. The Monetary Policy Committee’s next meeting  is in September.

Inflation edges higher: The annualised rate of inflation  rose from the BoE’s target of 2% to 2.2% during July, representing the first year-on-year increase so far in 2024. On a brighter note, growth in average earnings  (excluding bonuses) moderated from 5.7%  to 5.4% over the three months to the end of June.

UK economy expands in Q2: Having grown by 0.7% in the first quarter of 2024, the UK economy  expanded by 0.6% during the second quarter, lifted by activity in the services sector. The rate of unemployment  in the UK eased from 4.4%  to 4.2% over the three months to the end of June. According to the Office for National Statistics (ONS), summer discounting activity and sporting events provided a boost for retail sales  volumes during July. UK consumer confidence  remained stable overall during August, according to GFK’s Consumer Confidence Index: although expectations for the UK economy deteriorated for the first time since February, consumers appeared to be more optimistic about their personal financial outlook.

Mining sector dampens dividend expectations: Dividend payments from the mining sector are set to fall further this year, dampening the outlook for overall dividend growth in 2024. According to Computershare’s latest quarterly Dividend Monitor , headline growth in dividends is predicted to be 3.8%, while the forecast for underlying growth was cut from 1.5% to just 0.1%. Nevertheless, most sectors are expected to deliver growth, underpinned by strong contributions from the banking and oil sectors.