Analysis

August '23 Market Report

In August, global stock markets experienced their first monthly drop since February, primarily driven by fresh apprehensions regarding the stability of the Chinese property market, subdued economic data from China, and escalating sovereign bond yields. Although the majority of losses were recovered due to a late-month rally and a dip in the GBP/USD rate, the MSCI All Country World Index yielded a return of -1.3%, while gilts decreased by -0.6% in sterling terms.

During the initial half of August, ascending bond yields significantly influenced the frailty in equities, while the month-end recovery was bolstered by a relax in yields after they peaked at multi-year highs. The persistent strong correlation between government bond yields and stock markets continues, as both are notably influenced by short-term anticipations of central bank actions and long-term inflation predictions.

Recently, the US labour market has been under a spotlight, and employment data unveiled in early September kindled optimism for a potential slowdown in that arena. The paradox of "bad news is good news" has prevailed, wherein a weakening in employment metrics in the world's largest economy has fueled hopes that disinflation might persist without further interest rate hikes from the Federal Reserve (Fed). This was vividly evident following the disclosure of a stark decline in the US job openings number, triggering the most robust rally in US equity markets in two months.

Regarding equities, there have been significant adjustments in future earnings predictions following Q2 results, with enhancements observed in the US and Japan, while downgrades were noted in the UK and Emerging Markets. Persistent consumer spending and an uptick in oil prices have paved the way for upgrades in the consumer discretionary and energy sectors. Although valuations linger near their historical average, the "magnificent seven" - Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla - remain crucial influencers of US market dynamics, with the return concentration at a benchmark level peaking at a multi-year high.

Oil prices have surged recently, with Brent crude reaching US$90 a barrel, driven by sustained output cuts and a more durable demand scenario than previously anticipated. In a market that was trading in the low US$70s in June, three successive monthly gains propelled prices to their highest since September 2022. Saudi Arabia and Russia, major players in OPEC+, have played pivotal roles in the surge by persistently extending their production cuts, pushing prices even higher.

Surging oil prices and the potential for additional supply disruptions in natural gas this winter - given the ongoing Russia/Ukraine conflict - stand as risks that could spur another wave of energy-induced inflationary pressures, especially after the recent dip in the UK's July consumer price index to an annual 6.8%, down from 7.9% the preceding month.

Thus far, economies have demonstrated more resilience to the vigorous tightening of monetary policy than anticipated, with UK's Q2 GDP slightly increasing by 0.2% quarter-on-quarter, exceeding the consensus forecasts of 0.0%. Supportive data from the US has also kindled hope that central banks may achieve a "soft" landing, although potential future energy shocks linger as risks, indicating that a victory over high inflation may be premature.

In a nutshell, even if near-term GDP growth is exceeding expectations, it is nonetheless decelerating relative to past years. Inflation is showing signs of restraint and core inflation may potentially linger if labor markets stay tight. Regarding monetary policy, even though central banks are unlikely to increase rates significantly further, decreases in the forthcoming months seem improbable due to burgeoning expectations for a "soft" landing.