Market Analysis Aug 2020

In August, the S&P 500 hit a new high despite escalating US-China tensions. While these tensions remained a concern, positive economic data and the Federal Reserve's readiness to offer additional support drove the market. The Fed's shift to allow temporary inflation increases beyond the 2% target contributed to investor optimism. Core CPI inflation rose to 1.6% in July, and unemployment claims fell below 1 million. Consumer spending remained strong, but retail sales growth was below expectations. The IT, industrials, and consumer discretionary sectors performed well, while utilities, real estate, and energy stocks lagged.

Eurozone equities gained ground in August, although they lagged behind other regions. Industrials and consumer discretionary sectors performed strongly, with investors favoring areas expected to benefit from economic recovery. The German economy's Q2 decline was revised to a smaller -9.7%, and concerns arose about rising Covid-19 cases in Spain and France. The recovery momentum appeared to slow as indicated by the composite PMI index. The euro continued to strengthen against the US dollar.

UK equities climbed higher as risk appetite returned, driven by positive global growth outlooks. Small and mid-cap stocks benefited from signs of a robust Q3 recovery in the UK economy. Economically-sensitive sectors led the market, reflecting encouraging macroeconomic data and improved corporate news. Domestically-focused equities outperformed internationally-exposed large caps due to the strength of sterling against the US dollar.

Japanese equities rebounded in August, gaining 8.2% despite concerns about Prime Minister Abe's resignation due to health issues. Corporate earnings exceeded expectations, and economic data leaned towards positive surprises, especially in industrial production. Asia ex Japan equities performed well, supported by vaccine hopes and ongoing economic recovery, with strong performances from China and Hong Kong SAR. Taiwan and some other countries underperformed.

Investor optimism persisted in August, with a focus on the Federal Reserve's annual conference. The Fed's willingness to tolerate higher inflation strengthened expectations for prolonged accommodative monetary policy. Government bond yields rose, and the US dollar continued to weaken, benefiting corporate and emerging market bonds. The US 10-year Treasury yield increased by 18 basis points, and European yields also rose. High yield credit outperformed, while investment-grade corporate bonds saw negative returns due to rising yields.

Emerging market government and corporate bonds produced positive returns, led by high yield, although local currency-denominated debt was slightly lower. EM currencies had mixed performances. The Thomson Reuters Global Focus index for convertibles rose, driven by global investor interest, particularly in the technology-heavy US segment.