Stock markets rose significantly in July as investors increased bets that the Federal Reserve would begin slowing interest rate hikes sooner than expected.
This optimism came on the back of weak economic data, which spurred investors to believe the so-called Fed Pivot would come sooner rather than later.
Markets have been further bolstered in August owing to a stronger-than-expected jobs report and soft inflation data from the United States.
With inflation seeming to ease and the labour market remaining robust, the market seems to be pricing in an increased probability of a “soft landing” for the US economy.
Consequently, the MSCI All Country World Index, which gained 6,9 percent in July, has added a further 1,9 percent month-to-date (MTD).
Emerging markets continue to lag behind their developed counterparts, with the MSCI Emerging Markets Index losing 0,5 percent as compared with 2,1 percent for the MSCI World Index.
The US labour market continues to show resilience after adding another 528 000 jobs in July, with wage growth also accelerating 5,2 percent (y/y).
Adding to the relief were the softer-than-expected inflation figures; most notable was the fact that consumer prices did not rise in July (m/m) as the falling cost of fuel alleviated pressures.
Core CPI, which excludes the effects of volatile items like food and energy, also came in weaker at 0,3 percent (m/m) as compared with analyst expectations for a 0,5 percent rise. This data has boosted US markets, with the S&P 500 and Nasdaq Composite indexes rising 1,9 percent and 3,1 percent, respectively, month-to-date.
Despite the positive shift in data, caution must still be taken as many risks remain. Other parts of the US economy are still slowing, and Fed officials have reiterated the fact that monetary policy will need to stay tight for some time in order to fight inflation. Consequently, volatility is expected to remain elevated for the foreseeable future.
Rising political tensions between the US and China combined with slowing growth have kept Chinese markets on the backfoot in August.
China’s housing market woes and stringent Covid-19 policies have hampered growth, with many foreseeing the economy growing by a meagre 2 percent going forward.
Further hampering stocks is the re-emergence of delisting fears after the US SEC announced that additional Chinese companies, including retail giant Alibaba, would be added to the list of stocks facing delisting. As a result, the MSCI China index has lost 3,1 percent MTD, after falling 10,0 percent in July.
The UK economy remains at risk after the latest GDP data showed a contraction of 0,1 percent in the second quarter of 2022. Inflation also continues to climb, with prices accelerating by 9,4 percent (y/y) in June as compared to 9,1 percent the month before.
With the Bank of England now expecting inflation to pass 13 percent, it comes as no surprise that they raised interest rates by 50-basis-points for the first time since 1997.
The dire outlook has led the IMF to forecast the UK to have the slowest growth of G7 countries in 2023. Despite the gloomy outlook, the FTSE 100 index has still managed to advance 1,1 percent MTD.
In South Africa, inflation accelerated to 7,4 percent in June, which, subsequently, prompted the South African Reserve Bank to raise rates by 75-basis-points.
While higher prices and interest rates have hurt consumers’ pockets, hiking rates has helped the rand strengthen against all three majors in August.
Consequently, the rand has gained 2,8 percent against the greenback and is now trading below the technical R16,50 level. The rand has also advanced 2,7 percent and 2,0 percent against the pound and euro, respectively.
South African equities have continued to benefit from the risk-on environment, with the JSE All Share Index advancing 3,2 percent MTD, following the 4,1 percent jump in July.
All sectors have contributed with the biggest gainer being financials with 5,4 percent, followed by 3,1 percent and 2,0 percent for industrials and resources respectively. South African listed property has built on July’s momentum and has returned 1,2 percent MTD. — Moneyweb.