Global Market Review – August 2024

Global equity markets remained volatile in August. They finished higher upon generally good June quarter US earnings, solid economic data and gradually slowing inflation. Markets expect this will allow central banks to reduce interest rates over the coming months, delivering an economic soft landing, which can sustain profit growth.

Global equities gained 2.6% in USD terms but fell 0.9% in AUD terms.

August begins with a sell-off

Markets fell steeply during the first week of the month after the Bank of Japan surprised investors by raising interest rates from 0% to 0.15%. This led to the unwinding of carry trades, where investors borrow in currencies with low interest rates (e.g. yen) to invest in securities with higher return prospects (e.g. US Treasuries or tech shares).

Share market falls accelerated after weaker US labour market data suggested a faster slowdown in the US economy than markets had been expecting. Expectations of faster US interest rate cuts pushed US two-year Treasury yields down 0.34% to 3.92%, (bond prices rise as yields fall).

Technology stocks remain highly sensitive to earnings growth. Microsoft and Nvidia saw their shares pull-back despite better-than-expected June quarter earnings, upon concerns valuations were again looking excessive after making gains earlier in August.

Global sentiment continues to be held back by China’s sluggish economy, where manufacturing activity, export growth and house prices all fell.

But shares bounce back upon stronger data

Global share markets bounced back after ISM data showed US services and retail sales returned to expansion in July, easing fears of a recession. Later in August, June quarter US GDP was revised up to 3.0% and consumer sentiment improved.

Investor sentiment was further boosted when July US inflation unexpectedly fell to 2.9% from the previous 3.0%. Expectations the US Federal Reserve (Fed) would start cutting interest rates in September were effectively confirmed when Chair Jerome Powell at the annual Jackson Hole symposium said: “the time has come for policy to adjust.”

While the Fed kept US rates on hold in August, the UK’s Bank of England began to lower interest rates by 0.25% to 5.00%. Sweden, Mexico and New Zealand also reduced rates.

Geo-political risk eased as US presidential candidate Kamala Harris made gains in the polls following the Democratic Party convention. Meanwhile, oil prices were volatile but finished August lower as tensions in the Middle East eased.

Equity markets were further boosted by better-than-expected June quarter earnings in the US.

Economic weakness impacts Australian equities

Australian shares fell steeply at the start of August in line with other major global markets, closing 0.3% lower. Half-year corporate earnings fell 4.3% over the financial year, while investors had expected a 3.5% drop.

Monthly inflation fell to 3.5% in July, but this was distorted by government energy rebates. The Reserve Bank of Australia has indicated persistent inflation will prevent it from cutting interest rates this year, putting upward pressure on the Australian dollar.

The Australian share market was impacted by weaker commodity prices, as iron ore fell below US$100 per ton for the first time since November 2022, reflecting weak demand from China.

Australian house prices increased in August but falling sales volumes, increasing listings and stretched affordability are likely to constrain further price gains.

Outlook

• ‘Higher for longer’ interest rates have slowed the global economy but service inflation persists
• Interest rates are expected to fall this year across most developed economies, except Australia and Japan
• Slower consumer spending and weaker industrial output are impacting the earnings of some cyclical companies
• Geo-political risks remain elevated
• Stocks able to grow earnings through the business cycle should outperform as the economy slows