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August Thoughts …

September 12, 2019

Whilst August is traditionally a holiday month for western economies, and subsequently a quieter one for equity markets, it can prove to be volatile as low trading volumes combined with any news of even limited significance tends to have a materially higher impact on prices compared to ‘regular’ trading months.

This August was certainly volatile, but was impacted by a few significant economic and geopolitical headlines.  There were material gyrations and deviations across the various equity markets that seemingly followed a cycle of suffer and rebound followed by suffer and then rebound again.  This was particularly apparent for the S&P 500, which witnessed a handful of 3%+ swings during August only to end the month on flatter footing.  Additionally, the US equity market also went on to outperform, in some cases significantly so, other major regions.

The S&P 500 ended the month lower, once again impacted by the escalation of the US/China trade war.  August started with news that President Trump was to impose the new 10% tariff.  This was swiftly followed by retaliatory action from the Chinese government with the US government accusing China of driving their currency weaker versus the US Dollar.  The latter stages of August witnessed a rebound – particularly following comments from Jerome Powell that were interpreted as a signal for further interest rate cuts by the Federal Reserve – resulting in the S&P 500 ending the month down 0.9% whilst China’s CSI 300 weakened by 0.1%.

European equity markets, in contrast to US equities, registered significant larger declines during August, led by underperformance from European Banks.  Lenders with exposure to the Turkish Lira were materially impacted along with Italian Banks which were hit by rising domestic bond yields.  Across Europe, Germany reported a GDP decline of 0.1% in the second quarter of 2019, implying annual growth of only 0.4%.   Should Germany post a negative 3rd quarter GDP number, it will be deemed to be in technical recession.  European political tensions are also quite high with Italian woes continuing and UK facing the real possibility of a hard Brexit.  The UK’s FTSE 100 fell almost 5% whilst GBP was also negatively impacted even against a backdrop of an increase in base rates, only the second in over a decade.  UK base rates now sit at 0.75%.

Asia’s headlines were dominated by the protests in Hong Kong, which sent the Hang Seng market down 6.7% during August, falling into negative territory for 2019, the only major economy to have done so.  The local unrest added to US/China trade tensions.  Japan fell 3.5%, although driven entirely by external factors as there was no significant local news and economic data provided little to no direction.

Government Bond markets benefited as investors became risk averse, thus helping some bond yields reach record lows.  In the US, the 10-year yield fell below 1.5% and the 30-year yield dropped to a record low of 2%.  The 10-year yield is now lower than the 2-year yield and this inversion, whereby shorter dated yields are higher than longer dated yields, is a concern as it is deemed an indicator to an upcoming recession.  The 30-year German Bund yield fell below zero for the first time. 

Finally, a few words on the price of Gold.  The Gold price rose 5% during August.  The yellow metal ended the month priced at US$1520 and has increased almost 20% since the start of the year.  Gold is on pace for its best performance in almost 6 years.  The Trump trade wars have clearly influenced the Gold price.  Gold purchasers are concerned about the current environment, and that trade tariffs could lead to further weakening of global growth; rising tensions in the Middle East, Brexit and other geopolitical and economic concerns also aiding.  Gold is very much in demand during this market environment.  Over the short term, it is highly likely that prices will continue to rise fueled by the various economic concerns, a weaker US Dollar and also by ETF allocations from managers that under-own Gold, and are willing to purchase the Gold price at any level.

Michael Zacharia

Investment Director

This article has been prepared for information only.  Any opinions or views expressed are for information purposes only. The views expressed herein are generally those of Swiss Global which sets the long-term asset allocation models, along with both the strategic and tactical allocation.  Any material is provided for informational purposes only. It is important to note that the value of any investment and the income derived from it can go down as well as up. It may be affected by exchange rate variations and you may not get back the amount invested. Past performance is not necessarily a guide to future performance and individual taxation circumstances may vary. You should consult your tax adviser if in doubt. Any information provided does not constitute a recommendation and you should consult your adviser, consultant or financial representative for advice concerning your specific circumstances.  Any opinions expressed should not be relied upon and are subject to change without notice.  This material is for the sole use of the intended recipient and is for distribution only under such circumstances as may be permitted by applicable law.

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