Although August can sometimes be a troublesome month for financial markets, this year broke from that pattern as risk assets continued their recovery from their March lows. While equities and commodities rose strongly, safe haven assets gave up some of their gains made earlier in the year. This was also true within asset classes, with the riskier areas providing the best returns, while more defensive areas trailed.
Arguably the most important event of the month was a speech made by Federal Reserve (Fed) Chairman, Jerome Powell, when he indicated clearly that the US central bank would look to take a more relaxed view on inflation moving forward. The statement implied that interest rates would remain lower for longer as part of the Fed’s plans to “reflate” the US economy.
While COVID-19 cases continued to rise world-wide, markets took some encouragement from reports of new and better treatments, progress on vaccines and an apparent reduction in death rates. However, as the month drew to a close it became clear that infection rates were rising precipitously in a few European countries (France, Spain etc.), which led to the reintroduction of some travel quarantines and local restrictions.
Most equity markets rose, with the MSCI AC World Index advancing +3.9% in Sterling terms. Japan (+5.4%) and the US (+5.2%) were the strongest performers, While Emerging Markets (+0.1%) and the UK (+1.4%) lagged. At the sector level, cyclicals tended to outperform defensives, with the standout gains seen in consumer discretionary (+9.8%), information technology (+7.0%) and industrials (+6.0%), while utilities was the weakest area, losing -3.7%. From a style perspective, investors continued to back growth (+5.6%) more strongly than value (+2.0%), while larger companies (+3.9%) slightly outpaced smaller companies (+3.4%).
In a break from the recent past, the reflation trade saw bond yields generally on the rise with yield curves steepening. As a result, longer duration higher quality bonds performed poorly, with the JP Morgan Global Government Bond Index delivering a loss of -1.1%. Although credit spreads narrowed a little, higher quality corporate bonds took their lead from broader interest rates, and the ICE Merrill Lynch Global Corporate Investment Grade also lost -0.8%. In contrast, lower quality corporate bonds fared better, with the Merrill Lynch Global High Yield gaining +1.3% (all hedged to Sterling).
The reflation trade also provided a boost to the more economically sensitive commodities. Overall, the Bloomberg Commodities Index rose +4.5%, boosted by sharp increases in agriculture (+3.3%), industrial metals (+4.7%) and crude oil (+2.9%). Among the main commodity sectors, only the safe haven of gold (-2.4%) lost ground as investor risk aversion waned through August.
While Sterling was a little firmer against most currencies, the biggest story in the foreign exchange markets was the weakness of the US Dollar, which reacted in part to Fed Chair Powell’s comments about being more tolerant on inflation moving forward. With investors also feeling a little more adventurous, the demand for the Dollar as a safe haven also faded. Over the month, the US Dollar lost -2.1% versus Sterling, -1.3% against the Euro and -2.2% relative to the Chinese Yuan.
(Notes: All monthly data is quoted in Sterling terms unless otherwise stated).
|INDEX||END JULY VALUE||END AUGUST VALUE|
|DJ Ind. Average||26428.32||28430.05|
|£ Base Rate||0.10||0.10|
This month’s values quoted as at 31/08/2020. The above values are sourced from Bloomberg and are quoted in the relevant currency.
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