August General Markets Comments
« You gimme fever, and a cold sweat » – James Brown, 1970
Like in the 70s, markets are giving us cold sweats on a regular basis since the beginning of the year. And fever sometimes, when they rebound sharply. August was a perfect illustration: after a red-hot July (+7.9%), the MSCI World roared until mid-month, adding more than 3.7% at some point, but miserably tanked thereafter to close the month with a -4.3% return.
Forget about what’s happening on the ground in Ukraine: it’s all about politics, from Governments and Central Banks. The politics of Energy, with Russia clearly willing to clamp down gas supplies to Europe and the panic this triggers on Electricity prices; the politics of Trade, with the US putting more and more limits for US corporations to deal with China when it comes to sensitive stuff (semiconductors for example); the politics of Climate, with countries all around the world thriving to reduce their carbon emissions; and, perhaps more importantly, the politics of Central Banks, with the Fed deliberately freaking out investors by announcing pain down the road, as its monetary policy will be tougher for longer.
A relatively pleasant earnings season has vanished very quickly in people’s minds, the focus being now on the consequences of Jerome Powell’s stubbornness. Soft landing? Soft recession? Deep recession? The worst situation for markets in general is when there are big uncertainties; among these, the first and foremost is the magnitude of the hiking cycle by the Fed: when will they stop, and at what level?
All this is too much for markets to stand still. The second half of August was painful, to say the least, and all major assets were down at the end of the month: as mentioned, the MSCI World lost 4.3%, more or less like the S&P 500 (-4.2%), the MSCI Europe was down 5.2%, World Value 3.3%, World Growth 5.4%. The Japanese Topix rose 1.2%, but the Yen tumbled a further 4.1% versus the USD, and is down a whopping 20.5% this year!
No respite on Government bonds, as the US 10 year rose 54 bps and the 10 year Bund 72 bps, while credit weakened again: the Itraxx Crossover fell 2.6%. Gold lost 3.1%, Oil suffered its worst drawdown this year with the WTI down 9.2%.
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