Equity markets: end of summer upswing
Stocks fell in August, with the major indexes strengthening in the middle of the month and peaking around August 16, then reversing the month's trend. Growth stocks lagged behind value stocks (although both declined), and several large U.S. technology companies such as Tesla, Microsoft, Alphabet, and Amazon fell sharply (down more than 6% each). Within technology stocks, semiconductors underperformed. Some Chinese technology stocks recovered after an agreement was found between the U.S. and China on auditing Chinese firms listed in the US. Cyclical consumer goods lagged, and U.S. real estate developers dragged against rising yields. The materials sector benefited from gains at major fertilizer companies. Despite the decline in oil prices, energy was the best performing sector. While the rise in stock prices in the first half of the month was attributed to hopes of an inflation spike and a less aggressive Fed, the path of least resistance was downward in the second half of the month, with analysts citing factors such as ongoing concerns about China, negative earnings revisions, the impending acceleration of quantitative tightening in September and caution about the emerging energy crisis in Europe. Expressed in Euro terms, Eurozone equities (-5% for the month) lagged behind other regions, including the U.S. (-2.5%) and emerging markets (+1.8%). The energy crisis in Europe weakened European equities during the month.
|MSCI EMU NR||-5.0%||-7.5%||-17.2%||-15.4%|
|MSCI EUROPE NR||-4.9%||-5.6%||-11.8%||-7.9%|
|MSCI USA NR||-2.6%||2.5%||-6.6%||1.6%|
|MSCI JAPAN NR||-1.2%||1.1%||-7.1%||-4.9%|
|MSCI EM. MARKETS NR||1.8%||-0.4||-6.7%||-8.2%|
|MSCI AC WORLD NR||-2.3%||0.5%||-7.0%||-1.3%|
Bond markets: the rates are rising again
The price of U.S. Treasuries fell in August. As a result, the yield on 2-year bonds rose above 3% at the beginning of the month and reached 3.50% at the end of the month, the highest level since 2007. The spread between 2-year and 10-year yields remained inverted but narrowed after reaching its lowest level on August 9 (-0.46%). U.S. 10-year yields rose from 2.57% at the beginning of August to 3.19% at the end of August, while the German counterpart also rose sharply in August, from 0.78% to 1.54%. Corporate bond spreads were unchanged. With lower duration, corporate bonds outperformed government bonds last month, although both asset classes ended the month in negative territory as yields rose.
Central banks: towards further monetary tightening
The evolution of the Fed's expectations has played an essential role in financial markets over the past month. After the Fed meeting in July, investors expected a 50 basis point increase in the policy rate in September and a rate cut possibly as early as May 2023. But the Fed's speech quickly refuted these market expectations. Several Fed members stated that more progress needed to be done on the inflation front before any monetary policy easing could be considered. Chairman Powell's speech in Jackson Hole on August 26 was similar. Indeed, to restore price stability, he stated that monetary policy would remain tight for some time, which could cause some economic pain. Against this backdrop, market expectations for the policy rate have been revised upwards. The market now assumes a short interest rate ceiling of 3.75% - 4.00% in December 2022, which will remain at this level at least until the second half of the year. In the Eurozone, several members of the European Central Bank have called for a more considerable interest rate hike in September (a 0.75% increase is reportedly on the table).
|Fed funds||2.25-2.5%||+0.75%||July 2022|
|ECB deposit rate||0.0%||+0.50%||July 2022|
Currencies: the euro is still losing ground against the dollar
The sharp rise in energy prices in Europe and fears of a recession in the Eurozone weighed on the euro over the past month. Investors' assessment of U.S. monetary policy also supported the dollar. As a result, the dollar appreciated against the euro by 1.5% in August, reaching levels not seen since late 2002. The dollar index recorded its third consecutive monthly rise and is now up more than 13% for the year. As for other currencies, movements against the euro were limited. However, some Latin American currencies, such as the Brazilian real and the Mexican peso, rose almost 4% against the euro during the month.
Commodities: the downward trend continues
A stronger dollar and rising long-term interest rates weighed on the price of gold, which ended the month down 3.1% (in dollar terms). Oil lost ground: the WTI (West Texas Intermediate) fell 9.2% in August, its third consecutive monthly decline. European gas prices reached an all-time high in August but fell at the end of the month following discussions within the European Union to limit gas prices from Russia. Finally, industrial metals prices remained under pressure due to declining construction activity in China. For example, copper prices lost 1.8%, and aluminum prices lost 5.4%.