US equities overperformed in August, reaching an all-time high, on the back of strong economic data
Global equity markets have been mixed during August. The S&P 500 reached an all-time high (+2.9% since July 31st | +0.9% in the past week) due to a strong economic performance, while emerging market (EM) and euro area equities are in negative territory.
Investor sentiment was subdued, due, inter alia, to (US - China) “trade war” concerns and uncertainty in Turkey. Recall that in the US, the public consultation period has begun for increased tariffs of 25% on $200 bn worth of imports from China, and a final decision is likely by mid-September.
The prospect of a rise in US short and medium-term rates, as well as a stronger US Dollar, has weighed on emerging markets. Regarding the former, the minutes of the August 1st Fed meeting (issued on August 22nd), as well as Fed Chair Powell’s comments at the Jackson Hole Economic Symposium, supported the view that the Fed will proceed with the next rate hike of 25 bps, to 2.25%, at the September 26th meeting.
However, Mr. Powell stated that there was no clear sign of inflation overheating, thus alleviating concerns for faster monetary policy tightening by the Fed and leading the US Dollar lower by 0.5% in NEER terms on Friday (August 24th). Nevertheless, since July 31st, the USD is up by 0.4% in NEER terms and, more importantly, by 4.7% against EM currencies, due to the economic overperformance in the US and idiosyncratic factors in some EM countries (e.g. Turkey, Argentina, Brazil).
Overall, the MSCI EM Index is down by 1.7% in August, although it recovered by +2.7% in the past week and further by 1.8% on Monday, after US and Mexico reached a preliminary trade agreement. Similarly, Chinese equities (CSI 300 Index) are down 3.2% in August (-22% since mid-January 2018), albeit up by +3.0% wow in the past week and by a further +2.4% on Monday, as the Chinese Yuan showed signs of stabilizing (+1.0% wow against the USD, to $6.808 | -8.5% since early-April 2018).
In the euro area, the EuroStoxx posted solid gains during the past week (+1.5% wow) and on Monday (+0.9%), although remaining down by 1.3% since end-July. Banks were hit hard in August (-8.1% since July 31st), led by Italian Banks (-13.8%), due to rising policy uncertainty, as the submission of Italy’s 2019 Budget plan (by September 27th to the Italian Parliament and by October 15th to the European Commission) could increase concerns regarding the country’s fiscal health.
Turkey’s economic jitters added to the downside pressures for some euro area Banks that have a relatively high exposure to Turkey, e.g. Banco Bilbao Vizcaya Argentaria (BBVA | -12.0% during August) in Spain and UniCredit (UCG: -14.2% in the same period) in Italy, with 14% and 9% of their profits, respectively, stemming from Turkey in H1:2018.
Safe-haven demand drove core government bond yields lower in August. Indeed, the 10-Year Bund yield fell by 7 bps since July 31st, to 0.38%. In contrast, the Italian BTP/Bund spread in the 10-Year tenor widened by 50 bps in that period, to 278 bps (5-year high of 290 bps in late-May 2018).
The rotation towards US assets was also reflected in US Treasury bond yields. In the 10-Year tenor, yields have declined by 11 bps since end-July, to 2.85%. Nevertheless, based on CFTC speculative contracts, record net short positioning suggests little room for further yield downside (see graph).