August 2 0 2 4 • I S S U E 44

August Markets

August 2024 saw some volatility across global financial markets. Major indices experienced movements in both directions, influenced by economic data, central bank policy expectations, and geopolitical developments. Despite a downward correction to start the month, markets generally ended on a positive note, driven by the anticipation of rate cuts by major central banks, particularly the US Federal Reserve (Fed). 

US Markets

US markets exhibited mixed performance throughout August. The S&P 500 Index, after experiencing a mid-month correction, managed to end the month up by 2.4%. The market's early decline was primarily driven by concerns over a potential economic slowdown and geopolitical risks. However, as expectations for Federal Reserve rate cuts strengthened towards the latter part of the month, equities recovered, with broad gains across various sectors. The NASDAQ-100 Index also saw a recovery, with the tech-heavy index ending the month up 1.1%.

The bond market responded positively to the prospects of rate cuts, with the Bloomberg Global Aggregate Index posting a 2.8% gain. The yield on the benchmark 10-year Treasury fell, reflecting the increasing expectation of more aggressive rate cuts by the Fed. Meanwhile, US Treasuries as a whole outperformed other bond markets, delivering a return of 1.3% for the month. 

Eurozone

In the Eurozone, equities produced strong performance with the MSCI Europe ex-UK Index rising by 1.4% in local currency terms. Economic indicators in the region were mixed; while the French service sector received a boost from the Olympics, overall, economic conditions remained subdued. Earnings from cyclical companies disappointed, and economic growth concerns continued to weigh on investor sentiment. Despite this, the region's equities managed gains, supported by the lower-inflationary environment and a stable earnings outlook.

UK Markets

While only producing modest gains, UK markets showed resilience in August, boosted by strong performance in sectors such as financials and utilities. The FTSE All-Share Index gained 0.5%, driven by expectations of lower interest rates and a resilient domestic economy. The Bank of England's (BoE) decision of lowering its main policy rate as expected was seen positively, providing stability amidst global uncertainty. Investors also found confidence in the relatively lower valuations of UK stocks compared to their global peers, making them an attractive option amidst the global economic slowdown​.

Asia Emerging

Emerging markets in Asia faced notable challenges during August. The Chinese equity market continued to struggle due to ongoing trade tensions, a property market downturn, and demographic challenges. The MSCI China Index remained flat for the month, weighed down by weak economic data and investor concerns about policy effectiveness. However, some markets in the region, particularly in Southeast Asia, managed to post gains, benefiting from a weaker U.S. dollar and the prospect of rate cuts by the Federal Reserve, which helped improve the outlook for capital flows into emerging markets​.

Commodities

Commodity markets experienced a volatile month, reflecting broader global economic uncertainties. Oil prices retreated due to concerns over weaker demand from China and broader economic slowdown fears. The Bloomberg Commodity Index remained flat, with significant declines in industrial metals like iron ore, which hit a two-year low amid the ongoing real estate crisis in China. On the other hand, gold prices found support from the anticipation of Fed easing and geopolitical uncertainties.

August 2024 was marked by volatility but ultimately showed resilience across several markets. While initial concerns over economic growth and geopolitical risks triggered sharp market movements, the outlook for rate cuts by major central banks, particularly the Federal Reserve, helped stabilize and recover many asset classes. Going forward, investors will likely remain focused on central bank actions, economic data, and geopolitical developments, all of which will play crucial roles in shaping market performance for the remainder of the year.

Fixed Income Focus

The global fixed-income market is at a critical juncture. As central banks around the world, including the U.S. Federal Reserve, signal a potential shift in monetary policy, investors are closely watching how these changes could impact bond prices and yields. 

Understanding the Relationship Between Interest Rates and Bond Prices

To grasp the current dynamics in the fixed-income market, it is essential to understand the inverse relationship between interest rates and bond prices. When interest rates fall, the value of existing bonds generally rises. This is because older bonds, issued at higher interest rates, become more attractive compared to new bonds issued at lower rates. Consequently, investors are willing to pay a premium for these higher-yielding bonds, pushing up their prices.

Conversely, when interest rates rise, bond prices typically fall. New bonds are issued at the higher prevailing rates, making the older, lower-yielding bonds less attractive. As a result, their prices drop to align their yields more closely with the new market rates. This fundamental principle is a cornerstone of bond investing and is particularly relevant given the current economic backdrop.

The Federal Reserve's Potential Shift and Global Implications

The U.S. Federal Reserve, after a series of interest rate hikes aimed at curbing inflation, is now signalling that it will likely soon pivot to a more accommodative stance. With inflation having moderated significantly there are concerns about the potential for an economic slowdown. As a result, many market participants expect the Fed to begin cutting interest rates in the near future, likely this month.

This anticipated shift in policy has significant implications for the global fixed-income market. If the Fed indeed moves to lower rates, it could lead to a rally in bond prices, particularly in U.S. Treasuries, which are often seen as a benchmark for global fixed-income markets. A decline in U.S. interest rates would also likely influence other central banks to adopt similar policies, especially in developed markets where economic conditions are closely aligned with those in the United States.

Potential Opportunities in the Fixed-Income Market

For fixed-income investors, the prospect of falling interest rates presents a unique opportunity. In a declining rate environment, longer-duration bonds traditionally perform better than shorter-duration ones because their prices are more sensitive to changes in interest rates. Additionally, sectors like mortgage-backed securities (MBS) and municipal bonds could also see increased demand. MBS, for instance, tend to benefit from falling rates as homeowners refinance their mortgages, leading to lower prepayment risks. 

Emerging market bonds could also potentially present a favourable investment opportunity. With lower U.S. interest rates, capital flows may shift towards higher-yielding emerging markets, driving up bond prices in these regions. However, investors should be mindful of the risks associated with currency fluctuations and geopolitical uncertainties when considering such investments.

A Balanced Approach: Risk and Reward

While the prospect of lower interest rates could be beneficial for bond prices, investors must also consider the potential risks. A rapid decline in rates might signal underlying economic weaknesses, which could impact credit risk, particularly in the corporate bond market. High-yield bonds, while offering attractive returns, could face increased default risk if economic conditions deteriorate. Therefore, maintaining a diversified portfolio that balances exposure across different types of bonds and sectors is crucial.

Moreover, the timing and magnitude of rate cuts remain uncertain. The Federal Reserve has emphasised its data-dependent approach, meaning that any changes in monetary policy will be closely tied to economic indicators such as inflation and employment. This uncertainty requires investors to stay vigilant, but also not be overly swayed by short-term noise, maintaining focus on their long-term strategy.

Conclusion: Preparing for a New Phase in the Fixed-Income Market

As the global fixed-income market navigates this potential turning point, investors are presented with both opportunities and challenges. The possibility of falling interest rates, led by a potential shift in the U.S. Federal Reserve's policy, suggests that bond prices could rise, creating favourable conditions for fixed-income portfolios. However, a cautious approach that considers both the rewards and the risks associated with this environment is essential.

Sources

Volatility surges

Review of markets over August 2024

August 2024 Economic & Market Outlook

Index Monthly Scorecard: August 2024

"Federal Reserve Meeting Minutes," Federal Reserve, August 2024.

"Global Economic Outlook," International Monetary Fund, July 2024.

"Understanding Bond Market Dynamics," Bloomberg Finance, June 2024.

"The Relationship Between Interest Rates and Bond Prices," Investopedia, May 2024.