Market Overview

Summary of world markets in August

Equity market jitters triggered by a weak US employment report dissipated rapidly, with “bad news” becoming “good news” thanks to growing expectations of interest rate cuts.  US equities gained ground despite ongoing tariff developments, questions about the Federal Reserve’s independence, worries about inflation and steeper yield curves.  Positive returns were enjoyed by most other equity markets, although for sterling-based investors, further weakness from the US dollar dampened the outcome from global equities.  UK gilt yields rose amid inflation and fiscal sustainability concerns, with longer-dated maturities under the greatest pressure.  Against this backdrop, corporate bond returns were muted, while higher yielding bonds outperformed.

It was a relatively quiet holiday month in UK politics.  The Reform Party took the opportunity to dominate the news agenda on immigration as the number of people arriving in the UK surged.  Meanwhile, the UK’s new “one in, one out” deportation deal with France resulted in the first detainees.  With the UK’s long-term borrowing costs higher than other G7 countries, there were renewed fears about a “debt doom loop” amid expectations of further tax rises in the upcoming Autumn Budget but no plans to spur economic growth.

There was concern about the flagging employment market as employers cut payroll budgets in response to corporate tax increases, although the unemployment rate held steady at 4.7%.  It is becoming clear that those seeking their first jobs are bearing the brunt of the slowdown.  Retail sales volumes rose, although with grocers seeking to pass on higher costs, this was put down to an increase in food prices.  GDP rose by 0.3% in the second quarter, which was better than expected but flattered by an increase in government spending.  Meanwhile, the annual inflation rate jumped to 3.8% and services inflation, a closely watched gauge of underlying price pressures, climbed to 5%.  The Halifax House Price Index rose by 0.4% month-on-month (2.4% year-on-year).  In an earnings statement, housebuilder Persimmon summed up the challenges for the sector, pointing to the impacts of council tax, national insurance, stamp duty and energy bill increases upon consumers’ budgets.

The Bank of England cut the base rate by 0.25%, to 4%.  A two-round vote – the first in its history – highlighted the divided opinions of committee members against the backdrop of sticky inflation and a softening economy.  The Bank also flagged potential changes to its bond sales programme because of stress in long-dated UK gilts.

The main UK equity market delivered a positive return but lagged its developed market peers.  The precious metals sector was a stand-out positive performer thanks to the ongoing allure of gold and silver and strong cashflows from the miners.  Banking stocks came under pressure at the end of the month on fears of a tax raid on the sector.  Mid and smaller-cap indices were broadly in negative territory, with reduced expectations for interest rate cuts dampening sentiment.

The broad UK gilt market lost ground, led by longer-maturity bonds which continued to feel the pressure of concerns about inflation and fiscal sustainability.  The 30-year gilt breached the 5.60% mark, a level not seen for over two decades.  Indeed, the cost of 30-year borrowing is almost 1% higher than the much-maligned Prime Minister Truss episode.  Against the backdrop of rising gilt yields, UK investment grade bonds struggled to make headway and total returns were muted.  High yielding bonds outperformed, building further upon an impressive year for the asset class.

By recent standards, it was a quieter month for tariff announcements, although the pharmaceutical and semi-conductor sectors remained in President Trump’s sights.   The President also targeted countries that buy oil from Russia, placing India directly in the firing line with the result that levies of 50% were applied to a wide range of goods.  Prime Minister Modi stood firm, urging the country to build self-reliance to withstand external pressures.  Switzerland failed to secure a favourable trade deal, resulting in a 39% surcharge on exports to the US.

At the turn of the month, a federal appeals court ruled that most of President Trump’s tariffs were illegal, finding that he exceeded his authority by imposing them through an emergency law.  Hopes of progress in resolving the Russia-Ukraine conflict were dashed as hostilities intensified despite a carefully stage-managed meeting between Presidents Trump and Putin in Alaska.  In France, opposition to Prime Minister Francois Bayrou’s government forced him to call a confidence vote in September.

US equities recovered from early month jitters following the weak labour report to post up a fourth straight monthly gain, boosted by expectations of interest rate cuts, resilient consumer demand despite economic headwinds and corporate earnings beats (albeit versus muted expectations).  The much-anticipated earnings report from Nvidia saw the company provide a tepid revenue forecast, signalling that growth is decelerating after a two-year boom in AI spending.  Sector-wise, technology areas underperformed amid nervousness about extended valuations.  A report by the Massachusetts Institute for Technology found that 95% of corporate generative AI pilot projects failed to deliver a measurable financial return and this also weighed upon sentiment.  Meanwhile, some of the more unloved areas of the market, such as healthcare, enjoyed a return to favour.  Smaller-cap stocks also performed strongly this month, supported by the interest rate outlook and a more resilient economic backdrop than expected.

European equities gained ground thanks to strong returns from the smaller markets.  French equities fell against the backdrop of further political instability, while the German market continued its consolidation after the strong returns achieved early in the year.

Japan was one of the best performing developed markets, with sentiment boosted by the late July trade deal with the US, together with supportive economic data.

Within the Asian and emerging markets, Chinese equities delivered strong returns on the back of the tariff pause, hopes of new stimulus and investor enthusiasm for the asset class.  Latin American markets also made impressive gains.  By contrast, the Indian market suffered as investors grew increasingly nervous about the outlook following President Trump’s decision to impose additional tariffs, which many fear will price Indian goods out of the US market and benefit regional competitors such as Vietnam and Bangladesh.  A weaker month for the technology sector dampened returns from Taiwan and South Korea.

Across different markets, value indices outperformed growth indices.

The oil price fell amid oversupply concerns after a bearish forecast by the IEA.  Data also pointed to a rise in US inventories as the summer driving season ended.  The ongoing Russia-Ukraine conflict lent some support to the price.

After a period of consolidation, the gold price rose, supported by expectations of more dovish US monetary policy (which enhances the appeal of the non-interest-bearing asset) as well as its safe-haven appeal amid ongoing trade uncertainty.  Mid-month, there was an extraordinary moment of confusion when it was claimed that some gold bars would be subjected to levies.  The gold price also attracted buyers after President Trump removed Federal Reserve Governor Lisa Cook, fuelling concerns about the central bank’s independence.

The US dollar’s trend of weakness continued, with traders pricing in a very high chance of a cut to interest rates in September.  Questions about the central bank’s independence also weighed upon the greenback.