Damp squib of an August

James Penn
August 22, 2019

August is shaping up to be another difficult month for stock markets.

At the time of writing on the 16th, or midway through the month, the UK stock market is down -6.3% since July, with the US, European, Japanese, Hong Kong and Asian markets down -4.5%, -4.3%, -5%, -7.3%, and -6%.

Hong Kong may be facing some specific issues of its own with the current protests, but in the rest of the world, it is the familiar problems of slow growth, lack of confidence, and trade wars that are the cause.

It is a depressing contrast to a year ago, when stock markets were at highs, volatility was benign and consumer confidence was peaking.

The catalyst for the latest move down was Jerome Powell’s comments accompanying the US rate cut on July 31st. The chairman of the Federal Reserve stated in his press conference that the cut represented ‘a mid cycle adjustment in policy’, rather than the start of an easing cycle.

This deflated expectations that interest rates in the US could fall by as much as 1% over the next 12 months.

With the second most important economic bloc in the world after the US – the Eurozone – not really in a position to cut rates further (although it can still ease monetary policy by ‘unconventional’ means), the onus at a time of economic deceleration like this once again falls on America, and it was disappointing to hear that they may not be going further.

It could turn out otherwise, but Mr Powell – despite being one of the most overtly dovish members of the Federal Open Markets Committee – appears not to want to over-promise anything in advance.

The July rate decision was the first US cut in over a decade, the last one coming in December 2008 at the peak of the last recession.

Then the next day on August 1st President Trump ramped up his own rhetoric on trade with China, stating that tariffs of 10% would be imposed on an additional $300bn of Chinese exports to the US, effective on September 1st.

China has since retaliated with reciprocal measures of its own, including reducing US food imports.

Meanwhile, economic data has continued to trickle in with contrasting fortunes, which in broad terms can be summed up as, ‘Consumer – Good, Industrials – Bad.’

China’s industrial production growth slowed to its lowest level in 17 years, increasing 4.8% year on year in July – below expectations of a 5.8% increase.

Germany – Europe’s prime industrial country – went into contraction, with a -0.1% fall in GDP quarter on quarter, and zero growth year on year.

The UK also contracted in Q2, but this was expected and is largely due to a backing out of the stock-building effect that was seen in the first quarter ahead of the original March 31st Brexit deadline.

Consumer related data, on the other hand, has been much better: UK retail sales rose 0.2% in volume terms in July versus an expected -0.2% decline. This was boosted by online sales, with the Amazon Prime sales day on July 15th assisting a 6.9% growth in internet sales – but department store sales also rose for the first time this year.

In the US retail sales have also been strong, with July monthly growth of 0.7% versus an expected 0.3% rise, the best level in four months.

Perhaps sensing that things are spiralling out of control, on Tuesday last week President Trump delayed the imposition of the additional 10% tariff until December – which means that any potential price increases in shops will be deferred until after the Christmas shopping season, and offers some hope that it may not come in at all.

World stock markets bounced on the day, but went on to make further losses over the next two days, suggesting the markets still don’t see a resolution of the trade impasse any time soon.

It is unsurprising that in this environment government bonds have performed well, with US Treasuries on track for their best month since 2015. The US 30 year bond yield, which tends to project long term growth and inflation expectations, recently fell below 2% – last year it was 3.4%, and 4% as recently as 2013.

There are some potential catalysts on the horizon. The G7 meets on August 24-26 in France, and could offer some, what would it be, rapprochement on trade and other international disagreements, while in September the ECB is almost certain to resume its QE programme, with public equities potentially on the ‘Buy List’ for the first time.

But otherwise, it’s a fairly gloomy summer outlook for investors.

Far better to be out of the office and on the beach.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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