August was a month with two faces, as the positive momentum from July continued, until the central bankers gathered in Jackson Hole halfway through the month. Optimism took a hit due to a comment from the Federal Reserve Chairman. And due to the rise in interest rates (to the level of June 2022).
“Our responsibility to ensure price stability is unconditional”. - Jerome Powell, Chairman Federal Reserve
The declining stock markets and the high inflation pressure of July (8.9%) in the eurozone caused a dent in confidence. The hope of fewer interest rate hikes from central banks in the near future has therefore vanished. Emerging markets, on the other hand, performed better than developed markets thanks to good market performance in Taiwan and India.
Best fund performance in August 2022: Northern Trust Emerging Markets Custom ESG Equity Index Fund +1.02%
Stocks in developed countries started the month well, but the positive development was killed off in the second half of the month after comments from the Federal Reserve (FED). This was during the annual meeting attended by central bankers from all over the world. The FED indicated that curbing inflation is the top priority for the American central banks. To do this, they are even accepting some short-term pain in the markets.
The S&P 500 rose by 4% in the first half of the month but ended the month with -4.2% despite positive production and wage data. Shares in Europe also followed their American counterparts and the Stoxx 600 index recorded ~5% losses during the month. This is likely because the energy crisis continues to weaken the outlook in the second half of the year.
Shares in emerging markets performed better than their developed counterparts. They delivered a positive return (1%) during the month and were the best-performing funds thanks to good performance in markets such as Taiwan and India.
As one of the few economies, China lowers instead of raises interest rates. China aims to support growth with this after the extensive lockdowns that have damaged the economy.
The US and European 10-year yields rose sharply -to the level of June 2022- by 49 basis points in the US and 71 basis points in Germany. Thanks to the persistence of global central banks in controlling inflation with higher interest rates.
High-yield bonds and corporate bonds also recorded negative returns (respectively -0.88% and -4.5%) with the spread increasing during the month as the risk of a recession grew due to rising interest rates. After the ECB's interest rate hike (0.5%) last month, the money market yield continued to rise and closed the month positive.
- Any peaceful resolution of the war in Ukraine will be crucial to reducing market volatility.
- The meetings of the FED and the ECB are crucial in determining the future direction of the market.
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