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Ok. Got itThe market has been adversely impacted by the state of the Chinese economy while US crude inventories have seen an unprecedented rate of decline. Read the August 2023 market reviews.
Restrictive
Market sentiment soured against a backdrop of underwhelming Chinese data, stress in the Chinese property sector and further signals that monetary policy may stay restrictive for a prolonged period. In addition, investors were surprised by the credi ratings agency Fitch when they downgraded the United States (US) sovereign credit rating to AA+ from AAA, citing mounting deterioration of fiscal metrics and political dysfunction.
Releases of credit extension, trade metrics and retail sales data all point to a stumbling Chinese economy. Pricing dynamics in China echoed domestic activity challenges and stood in stark contrast to the rest of the world. Consumer prices officially moved into deflation, printing at -0,3% yoy, while producer priced printed at a lower than expected -4,4% yoy. Chinese authorities announced several measures, including a cut in stamp duty and an easing of lending rates to support financial markets, the ailing economy and the property sector.
Saudi Arabia and Russia announced an extension of production cuts to September, while US crude inventories declined at a record pace. A robust demand backdrop, supported by summer tourism and power generation, alongside curtailed supply, saw the oil price increase by 1,5% over the month, before jumping above US$90 a barrel at the start of September. Strikes at Australian gas plants sent European gas prices soaring by 22,9%, highlighting Australia’s position as one of the world’s biggest exporters of liquified natural gas and the ongoing tightness of this market.
US headline inflation increased to 3,2% yoy in July as the impact from base effects starts to dissipate. Despite the higher print, the month-on-month change was steady and the figure below market expectations. Core inflation moderated to 4,7%, albeit still at elevated levels. Data for the US personal consumption expenditure price index (PCE) was recorded at 3,3%, with the annual rate for core PCE – the US Federal Reserve (Fed)’s preferred measure of inflation – printing at 4,2%. Both measures showed steady monthly increases. After several months of declines, producer prices increased to 0,8% from 0,2% the previous month. Fed chair Jerome Powell delivered a hawkish speech at the annual Jackson Hole Conference for central bankers. US labour market data provided more evidence of a robust but cooling labour market, which included an increase in the unemployment rate to 3,8% from 3,6%.
The Bank of England (BOE) increased the policy rate by 25 bps to 5,25%, in line with expectations. The BOE also lowered forecasts for economic growth and warned that interest rates may stay high for an extended period. Against expectations, the United Kingdom (UK) economy expanded by 0,2% over the second quarter. Brazil cut local interest rates by 50 bps, initiating the cutting cycle. The eurozone economy expanded by 0,3% in the second quarter, while headline inflation for July declined to 5,3% and core inflation remained steady at 5,5%. Unemployment within the region recorded a historic low of 6,4%.
Both developed and emerging market equities suffered major drawdowns in August as volatility picked up and investors recalibrated for restrictive conditions. S&P 500 lost 1,6%, while declines in the UK and across Europe were more meaningful.
Domestic Chinese assets suffered noteworthy losses as the investors priced lacklustre economic data and the possibility of property developer Country Garden defaulting on upcoming bond payments. The Hang Seng Index declined by 8,7%, dragging the MSCI Emerging Markets Index down by 6,1%.
Sovereign bond yields increased over the month as policymakers highlight data dependence in the ongoing fight against inflation, with a distinct hawkish bias to tighten further, if needed. The Bloomberg Global Aggregate Bond index declined by a hefty 1,4% in August, reversing much of the gains this year and leaving the index up only 0,7% year to date. US bond yields traded under pressure over the month, with the US 10‑year bond yield reaching a cycle high of 4,34% during the month. With investors calibrating scenarios and pricing a higher probability of higher rates, the US dollar appreciated by 1,7% on a trade-weighted basis in August, leaving the greenback marginally positive at 0,1% year to date.
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Nedgroup Private Wealth (Pty) Ltd and its subsidiaries (Nedbank Private Wealth) issued this communication. Nedgroup Private Wealth is a subsidiary of Nedbank Group Limited, the holding company of Nedbank Limited. ‘Subsidiary’ and ‘holding company’ have the same meanings as in the Companies Act, 71 of 2008, and include foreign entities registered in terms of the act. There is an inherent risk in investing in any financial product. The information in this communication, including opinions, calculations, projections, monetary values and interest rates, are guidelines or estimations and for illustration purposes only. Nedbank Private Wealth is not offering or inviting anyone to conclude transactions and has no obligation to update the information in this communication. While every effort has been made to ensure the accuracy of the information, Nedbank Private Wealth and its employees, directors and agents accept no liability, whether direct, indirect or consequential, arising from any reliance on this information or from any action taken or transaction concluded as a result. Subsequent transactions are subject to the relevant terms and conditions, and all risks, including tax risk, lie with you. Nedbank Private Wealth recommends that, before concluding transactions, you obtain tax, accounting, financial and legal advice. Nedbank Private Wealth includes the following entities: Nedbank Ltd Reg No 1951/000009/06 (NCRCP16) (FSP9363). Nedgroup Private Wealth (Pty) Ltd Reg No 1997/009637/01 (FSP828). Nedgroup Private Wealth Stockbrokers (Pty) Ltd Reg No 1996/015589/07 (NCRCP59) (FSP50399), a member of the JSE. |
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