VIDEO: Market Snapshot August 2019
Our Market Snapshot provides an overview of key events that influenced financial markets over the course of August 2019.
Global equity markets fell substantially in August, as investors were left to deal with a plethora of negative news. The trade war between the US and China continued to escalate, Brexit uncertainties multiplied after UK PM Boris Johnson suspended parliament, Germany began showing plausible signs of an imminent recession and an inversion in the US yield curve sparked concerns of a slowdown in US growth. Emerging markets suffered more than developed markets as investors fled for safe-haven assets, with bonds and gold the biggest beneficiaries. In South Africa, global risk aversion and concerns around slower growth and higher government spending, particularly on bailing out indebted SOEs, weighed on the market, with the likelihood of a further ratings downgrade seeming inevitable.
In the US, the Trump administration raised the ante in the trade war with China, announcing new 10% tariffs on US$112bn worth of Chinese goods, including clothing and shoes, starting 1 September. Talks between the two nations are set to resume in mid-September after the previous round of negotiations concluded without a resolution.
Following the US Fed’s late-July signal that it might not continue cutting interest rates, short-dated US Treasury bond yields rose and we saw a deep but short-lived inversion of the yield curve (where the yield on the two-year treasury note rose above the 10-year yield) for the first time since 2007. However, the US economy continued to show signs of advancing (albeit at a slower pace), with revised GDP showing 2.0% y/y growth in the second quarter of 2019, slightly below the preliminary estimate of 2.1% y/y. Consensus growth forecasts for 2019 and 2020 were revised down by 0.2% to 2.3% and 1.8% respectively.US stock markets reflected the more bearish outlook, with all three major US bourses in the red.
UK AND EUROPE
In Britain, Prime Minister Boris Johnson moved to suspend parliament until mid-September, sparking fears of a no-deal departure from the EU on 31 October. This sent the pound sterling and UK stocks sharply lower for the month. UK CPI rose 2.1% y/y in July, ahead of market expectations of 1.9% y/y and above the BoE’s 2% y/y target. GDP, meanwhile, expanded 1.2% y/y in the second quarter of 2019, down from 1.8% y/y in the previous quarter and below market consensus of 1.4% y/y.
Elsewhere, German GDP contracted by 0.1% q/q for Q2 following a 0.4% q/q increase in Q1. Germany's coalition government announced that it would be prepared to ditch its balanced budget rule and take on new debt in order to avoid recession. This still did not help prevent German (and some other European) bond yields from falling further into negative territory, leaving investors and policymakers wondering what the impact could be on the economy of an extended period of negative interest rates: investors continue to accept guaranteed losses on their bond holdings for the privilege of lending money to governments.
Italian stocks rallied after President Sergio Mattarella gave the greenlight for the 5-Star Movement and the Democratic Party to form a new coalition government.
China started the month with a stark warning in its trade war with the US by allowing the yuan to weaken to above 7 versus the US dollar, reaching its lowest level in 10 years. Then in response to Trump’s new tariffs for 1 September, authorities announced additional tariffs on US$75bn worth of US goods, including 5% on US crude oil. Meanwhile,the anti-government protests in Hong Kong grew in size and intensity, putting increasing pressure on the country’s consumer sales and economic growth generally, as well as on the stock market. Government officials cracked down more severely, while stating that the activities had begun to show "sprouts of terrorism". US President Trump commented on the protests, suggesting that China’s failure to find an amicable resolution could impact trade negotiations. Chinese CPI came in at 2.8% y/y in July its highest rate in 17 months, and marginally higher than the 2.7% y/y recorded in June.
In Japan, the economy advanced 0.4% q/q for the three months ending June, beating market expectations of 0.1%, but lower than the 0.7% growth posted in in Q1. Unemployment fell to 2.2% in July, the lowest since 1992 and below market expectations of 2.4%. Consumer price inflation fell to 0.5% y/y in July, down from 0.7% in the previous month and in line with market expectations.
GLOBAL MARKET RETURNS
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned -2.3%. Developed markets outperformed emerging markets, with the MSCI World Index delivering -2.0% and the MSCI Emerging Markets Index returning -4.9%. Among developed markets, the S&P 500 produced -1.6%, the Dow Jones Industrial 30 returned -1.3%, while the technology-heavy Nasdaq 100 posted -1.9%. The UK’s FTSE 100 returned -4.6% and Japan’s Nikkei 225 delivered -1.5%. Among the larger emerging markets, the MSCI India returned -2.9%, MSCI China -4.2% and MSCI Russia -4.7% (all in US$). The Bloomberg Barclays Global Aggregate Bond Index (US$) returned 2.0%, while the EPRA/NAREIT Global Property Index (US$) produced 2.4%.
Gold reached a six-year high in August as investors fled to safe-haven assets. Gold closed the month 6.3% higher, platinum was up 6.6%, silver 11.6% and nickel 24.4%. In contrast, it was a volatile month for oil as concerns around lower global growth and slower trade weighed on the price of Brent crude. These were offset to some extent by news of production cuts from major oil exporting regions and sanctions on Iran and Venezuela. By month-end, Brent crude was trading at around $61 per barrel, down from around $65 per barrel at the beginning of August.
In South Africa, equities and the currency came under pressure on the back of the escalating trade tensions and renewed concerns over a slowdown in global growth. factors weighing on investor sentiment included worries over the government’s growing National Budget deficit; higher spending on bailing out Eskom and other SOEs; and the tabling of the new National Health Insurance bill with parliament (which is estimated to cost the economy around R256bn per year). Ratings agency Moody’s criticised Eskom’s capital structure – describing it as “unsustainable”, and emphasised its worries over SA’s growth rate. This drove the rand over R15/US$ for the first time in two months. National Treasury, meanwhile, released its economic policy paper in which it outlined proposed actions to cut costs and stimulate economic growth, a move that was met with mixed reviews by the market.
July CPI fell to 4.0% y/y from 4.5% in June, well below the 4.4% expected and the mid-point of the SARB’s 3-6% target range. This lifted hopes of further interest rate cuts and supported nominal bonds, but put further pressure on inflation-linked bonds.
The FTSE/JSE All Share Index returned -2.4% in August. Resources counters benefited to an extent from their dollar earnings, as the sector returned -0.2%, while Industrials delivered -3.0%, Financials -3.7%, and Listed Property -3.1% (as measured by the All Property Index). The BEASSA All Bond Index returned 1.0 %, inflation-linked bonds (the Composite ILB Index) delivered -0.2%, and cash as measured by the STeFI Composite Index returned 0.6%.
The rand depreciated sharply against all major currencies for the month, losing 7.1% against the US dollar, 6.5% against the pound sterling and 5.9% against the euro.