Global equities had a tough start to the month, falling 6% in the first three trading days of August but then bounced back strongly to deliver another positive month for global equities (MSCI World Index +2.7% MoM), which ended August up 17% YTD. Weak US jobs data was the catalyst for risk aversion early in August, with the US unemployment rate unexpectedly jumping to 4.3%, leaving it 0.5% higher over three months, a pace of deterioration which has been a reliable early indicator of past US recessions. Another source of risk-aversion came from the Japanese central bank, which unexpectedly hiked rates and announced plans to slow quantitative easing. The Japanese yen has been a source of cheap funding for decades, and the prospect of that fading put pressure on many trades that have historically been funded with cheap yen borrowing, including high-yielding emerging market (EM) loans and crowded equity market positions. Ultimately, investors overcame those concerns, and the most recent US inflation data (2.9% YoY) reinforced the trend of moderating price growth, which in turn raised expectations for accelerated monetary easing.
The prospect of lower interest rates was supportive for equity sectors that traditionally have high dividend yields, with the consumer staples and real estate investment trust (REIT) sectors (both +6% MoM) of the S&P 500 leading the way for US equities. EMs underperformed their developed market (DM) peers but did enough (MSCI EM +1.6% MoM) to push their YTD performance towards double digits (MSCI EM +9.8% YTD). Taiwan Semiconductor Manufacturing Company (TSMC) is now comfortably the largest component of the MSCI EM Index (at 9.3%), and it was responsible for c. 40% of the YTD performance and one-quarter of August’s MoM performance. Brazil, the EM laggard in 1H24 (Bovespa -8% in 1H24), was the star EM performer in August (+6.5% MoM).
Deteriorating US employment data and moderating US price growth left investors anticipating c. 1% of US Federal Reserve (Fed) rate cuts in the remaining three meetings of 2024. This, in turn, helped drag the US government’s 10-year borrowing rate below 4% p.a., boosting the performance of global bonds (Bloomberg Bond Index +2.4% MoM), which are now back in positive territory YTD (+1.9%). The prospect of lower US funding rates weighed on the US dollar, with the US Dollar Index (–2.3% MoM) erasing most of its YTD gains (+0.4% YTD).
