Sabco® Investment's Monthly Market Report - August, 2022

Sabco® Investment's Monthly Market Report - August, 2022

In the beginning of the month, equity markets experienced a continuation of the upward trend seen since June. However, as the month progressed, central bankers' statements, deteriorating confidence indicators, and energy problems in Europe weakened equities. Consequently, the euro further depreciated against the dollar, while interest rates rose once again.

August saw a decline in stock prices, with major indexes initially strengthening around mid-month and reaching a peak on August 16, only to reverse the trend for the rest of the month. Growth stocks performed worse than value stocks, with notable drops in the share prices of large U.S. technology companies like Tesla, Microsoft, Alphabet, and Amazon, each experiencing declines of over 6%. Within the technology sector, semiconductors underperformed. Some Chinese technology stocks recovered after the U.S. and China reached an agreement regarding the auditing of Chinese firms listed in the U.S. Cyclical consumer goods lagged, and U.S. real estate developers struggled due to rising yields. On the other hand, the materials sector benefited from gains made by major fertilizer companies, while the energy sector performed the best despite the decline in oil prices. The rise in stock prices during the first half of the month was attributed to hopes of an inflation spike and a less aggressive Federal Reserve. However, the second half of the month experienced a downward trend due to concerns about China, negative earnings revisions, the impending acceleration of quantitative tightening in September, and caution surrounding the emerging energy crisis in Europe. In terms of euro performance, Eurozone equities (-5% for the month) underperformed other regions, including the U.S. (-2.5%) and emerging markets (+1.8%), as the energy crisis in Europe weakened European equities.

In August, the price of U.S. Treasuries decreased, leading to a rise in yields. The yield on 2-year bonds exceeded 3% at the beginning of the month and reached 3.50% by the end, the highest level since 2007. Although the spread between 2-year and 10-year yields remained inverted, it narrowed after reaching its lowest point on August 9 (-0.46%). U.S. 10-year yields increased from 2.57% at the start of August to 3.19% by the end, while German yields also rose sharply from 0.78% to 1.54%. Corporate bond spreads remained unchanged. Despite both asset classes ending the month with negative returns due to rising yields, corporate bonds outperformed government bonds last month, thanks to their lower duration.

The expectations surrounding the Federal Reserve's actions played a crucial role in financial markets during the past month. After the July Fed meeting, investors anticipated a 50 basis point rate increase in September, with the possibility of a rate cut as early as May 2023. However, the Fed's communication quickly dispelled these expectations. Several Fed members emphasized the need for more progress in addressing inflation before considering any monetary policy easing. Chairman Powell's speech in Jackson Hole on August 26 reiterated this stance, stating that monetary policy would remain tight for a significant period, which could have economic consequences. As a result, market expectations for the policy rate were revised upwards, with the market now assuming a short-term interest rate ceiling of 3.75% - 4.00% in December 2022, expected to remain at that level until at least the second half of the following year. In the Eurozone, several members of the European Central Bank have called for a substantial interest rate hike in September, with reports suggesting a potential increase of 0.75%.

Over the past month, the euro was weighed down by the sharp rise in energy prices in Europe and concerns of a recession in the Eurozone. Additionally, investors' assessment of U.S. monetary policy supported the dollar, leading to a 1.5% appreciation of the dollar against the euro in August, reaching levels not seen since late 2002. The dollar index recorded its third consecutive monthly gain and has increased by over 13% for the year. Other currencies had limited movements against the euro, but certain Latin American currencies, such as the Brazilian real and the Mexican peso, rose by almost 4% against the euro during the month.

A stronger dollar and rising long-term interest rates put pressure on the price of gold, which experienced a 3.1% decline in dollar terms. Oil prices also declined, with WTI (West Texas Intermediate) falling by 9.2% in August, marking the third consecutive monthly decrease. Although European gas prices reached a record high during the month, they fell towards the end following discussions within the European Union to address gas prices from Russia. Furthermore, industrial metals prices remained under pressure due to a decline in construction activity in China. For instance, copper prices dropped by 1.8%, and aluminium prices fell by 5.4%.