August Global Markets Recap
Highlights
- Can Japan Carry its own weight?
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US Markets
The equity market sell-off at the beginning of the month was brief, even as the S&P 500 and Nasdaq 100 saw their weakest starts to September since 2015 and 2002, respectively. After an initial spike in volatility, investors were reassured by the potential for lower interest rates and a strong Q2 earnings season, which showed minimal signs of an imminent economic slowdown. This optimism allowed most markets to recover their losses by mid-month. The S&P 500 remained a leader, driven by a broadening of earnings growth beyond the technology sector.
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Over the past four quarters, the Mag 7 companies have achieved over 30% year-over-year earnings growth, with expectations of 29% growth in Q2 2024. However, on a quarter-over-quarter basis, this will likely mark the second consecutive quarter of contraction before growth can reaccelerate in the latter half of the year.
While earnings growth has been impressive and is expected to remain strong, a significant portion of recent returns has been driven by valuation expansion, which warrants caution. If earnings estimates are revised downward, valuations could contract sharply, potentially leading to a steep decline. Investor expectations for the Magnificent 7 have been exceptionally high, and those that reported thus far have experienced mixed reactions. Despite delivering strong results, some companies spooked investors with higher capital expenditures on AI, without immediate revenue benefits. However, it's worth noting that the valuations of the Magnificent 7 are now lower than at the start of the year, and their strategic positioning in the AI transformation remains compelling.
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US Economy
The U.S. economy added a weaker-than-expected 114,000 jobs last month, with wage growth slowing significantly to 3.6% year-over-year and hours worked declining 0.3% month-over-month to a post-pandemic low1. The unemployment rate has risen nearly a full percentage point to 4.3% in July, its highest level since October 2021. While much of this increase in unemployment can be attributed to a stronger labor supply, the ongoing effects of restrictive monetary policy are likely to further suppress labor demand. As the U.S. elections draw near, it will also be important to closely monitor the outlook for tax, trade, and regulatory policies, especially in light of President Biden’s decision not to seek re-election.
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Global Markets
The Bank of Japan's decision to raise its policy rate by 25 basis points, combined with Governor Ueda’s hawkish stance, triggered a significant unwinding of carry trade positions that had capitalized on low Japanese yen borrowing costs to invest in higher-yielding assets. This led to a dramatic 12% drop in the TOPIX Index on August 5th, marking its largest single-day decline since Black Monday in 1987. The unexpected rate hike caught investors by surprise, resulting in a sharp appreciation of the yen. This stronger yen, which increases borrowing costs, has adversely affected the prospects for Japanese exports. The resulting market turmoil led to a substantial sell-off in Japan’s Nikkei Index, which also fell over 12% in a single day. This sell-off had a cascading effect, intensifying the downward trend across global markets at the start of the month.
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Fixed Income Markets
August was a strong month for fixed income investors. Early-month volatility prompted a flight to quality, as concerns about the economic outlook led investors to anticipate more aggressive rate cuts by major central banks. Within the developed sovereign bond market, long-dated U.S. Treasuries outperformed, posting returns of 1.24%. This performance was driven by expectations that the Federal Reserve will implement more pronounced rate cuts compared to the European Central Bank. European sovereign bonds also benefited from the favorable bond market conditions, though to a lesser extent. Japanese government bonds saw increased demand from domestic investors following the unwinding of carry trades at the start of the month. Global credit markets performed well, buoyed by a stable corporate earnings outlook. The flight to quality particularly supported global investment-grade bonds, which delivered a 1.53% return, making it the top-performing sector for the month.
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Sources:Â
1.https://www.ey.com/en_us/insights/strategy/macroeconomics/employment-report#:~:text=The%20economy%20added%20a%20weaker,to%20a%20post%2Drecession%20low.
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August Global Markets Recap
Highlights
- Can Japan Carry its own weight?
‍
US Markets
The equity market sell-off at the beginning of the month was brief, even as the S&P 500 and Nasdaq 100 saw their weakest starts to September since 2015 and 2002, respectively. After an initial spike in volatility, investors were reassured by the potential for lower interest rates and a strong Q2 earnings season, which showed minimal signs of an imminent economic slowdown. This optimism allowed most markets to recover their losses by mid-month. The S&P 500 remained a leader, driven by a broadening of earnings growth beyond the technology sector.
‍
Over the past four quarters, the Mag 7 companies have achieved over 30% year-over-year earnings growth, with expectations of 29% growth in Q2 2024. However, on a quarter-over-quarter basis, this will likely mark the second consecutive quarter of contraction before growth can reaccelerate in the latter half of the year.
While earnings growth has been impressive and is expected to remain strong, a significant portion of recent returns has been driven by valuation expansion, which warrants caution. If earnings estimates are revised downward, valuations could contract sharply, potentially leading to a steep decline. Investor expectations for the Magnificent 7 have been exceptionally high, and those that reported thus far have experienced mixed reactions. Despite delivering strong results, some companies spooked investors with higher capital expenditures on AI, without immediate revenue benefits. However, it's worth noting that the valuations of the Magnificent 7 are now lower than at the start of the year, and their strategic positioning in the AI transformation remains compelling.
‍
US Economy
The U.S. economy added a weaker-than-expected 114,000 jobs last month, with wage growth slowing significantly to 3.6% year-over-year and hours worked declining 0.3% month-over-month to a post-pandemic low1. The unemployment rate has risen nearly a full percentage point to 4.3% in July, its highest level since October 2021. While much of this increase in unemployment can be attributed to a stronger labor supply, the ongoing effects of restrictive monetary policy are likely to further suppress labor demand. As the U.S. elections draw near, it will also be important to closely monitor the outlook for tax, trade, and regulatory policies, especially in light of President Biden’s decision not to seek re-election.
‍
‍
Global Markets
The Bank of Japan's decision to raise its policy rate by 25 basis points, combined with Governor Ueda’s hawkish stance, triggered a significant unwinding of carry trade positions that had capitalized on low Japanese yen borrowing costs to invest in higher-yielding assets. This led to a dramatic 12% drop in the TOPIX Index on August 5th, marking its largest single-day decline since Black Monday in 1987. The unexpected rate hike caught investors by surprise, resulting in a sharp appreciation of the yen. This stronger yen, which increases borrowing costs, has adversely affected the prospects for Japanese exports. The resulting market turmoil led to a substantial sell-off in Japan’s Nikkei Index, which also fell over 12% in a single day. This sell-off had a cascading effect, intensifying the downward trend across global markets at the start of the month.
‍
Fixed Income Markets
August was a strong month for fixed income investors. Early-month volatility prompted a flight to quality, as concerns about the economic outlook led investors to anticipate more aggressive rate cuts by major central banks. Within the developed sovereign bond market, long-dated U.S. Treasuries outperformed, posting returns of 1.24%. This performance was driven by expectations that the Federal Reserve will implement more pronounced rate cuts compared to the European Central Bank. European sovereign bonds also benefited from the favorable bond market conditions, though to a lesser extent. Japanese government bonds saw increased demand from domestic investors following the unwinding of carry trades at the start of the month. Global credit markets performed well, buoyed by a stable corporate earnings outlook. The flight to quality particularly supported global investment-grade bonds, which delivered a 1.53% return, making it the top-performing sector for the month.
‍
‍
Sources:Â
1.https://www.ey.com/en_us/insights/strategy/macroeconomics/employment-report#:~:text=The%20economy%20added%20a%20weaker,to%20a%20post%2Drecession%20low.
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