August 2024 Market Report
August was a volatile month for investors. Weak economic data and an interest rate hike by the Bank of Japan sparked an aggressive sell-off. The market however recovered the losses upon news the US Federal Reserve would begin to ease interest rates as soon as September. As for Australia, inflation remains persistent at 3.8% placing continued cost pressures on households and businesses.
Volatility Spikes
Global markets tumbled in the first week of August. Soften-than-anticipated US jobs and manufacturing data led markets lower before a surprise interest rate hike by the Bank of Japan triggered a broader sell-off. For years, traders have capitalised on stable and ultra-low interest rates in Japan to borrow Yen and purchase risk assets.
However, the Bank of Japan’s decision to increase rates by 25 basis points (which increases the cost of said debt) coupled with hawkish guidance caught investors wrong-footed. Volatility spiked to levels not seen since the pandemic as leveraged investors rushed for the exit. The Nasdaq Composite was down nearly 8% and losses for S&P 500 exceeded 5%. The Nikkei 225 plunged over 12%, the single worst trading day since 1987.
Source: Bloomberg
Fortunately, the declines were recouped later in the month. The S&P/ASX 200 finished up 0.44% and has appreciated 8.95% for the year. Similarly, international equities are sitting on double-digit year-to-date gains. The market blip reminds us of a quote from Benjamin Graham: “In the short run, the market is a voting machine but in the long run, it is a weighing machine”.
Central Banks Begin Easing Interest Rates
Central banks across the world have either flagged or begun interest rate cuts. US Federal Reserve Chairman Jerome Powell confirmed the central bank would pivot to rate cuts as soon as September: “The time has come for policy to adjust”.
Yields on US 10-Year Treasury Notes subsequently declined from above 4.0% to below 3.8% to reflect the prospect of the lower long-term interest rates. Recall when bond yields fall, the prices of said bond appreciate. Meanwhile, Switzerland, China, Canada, the Eurozone and the United Kingdom are pursuing varying degrees of monetary easing. And while Japan did increase its policy rate, base rates remain markedly lower than other developed nations.
Source: RBA
The odd one out remains Australia, which is still trying to put the inflation genie back in the bottle. The Reserve Bank of Australia left the cash rate unchanged at 4.35% at the August policy meeting. Importantly the central bank remains “vigilant to upside risk to inflation” and interest rates will remain elevated until the bank is “confident inflation is moving sustainably towards the target range”. The central bank’s forecasts have underlying inflation reaching 2.5% by the end of 2027, six months later than the May forecast. Inflation has now been above the bank’s target band for 31 months.
Reporting Season
August marked the annual reporting season for many companies listed on the ASX. The results were largely in line with expectations, with many calling out the rising cost of business (labour, materials, shipping) and subsequent downward pressure on profitability.
This is reflected across sectors, including supermarkets, insurance and building homes. To that end, Mirvac pointed to several apartment developments that had been put on hold as they were no longer feasible. Moreover, JB Hi-Fi said consumers are increasingly “looking for value”.
Commodity Rout
Commodities broadly continue to underperform. Prices for iron ore have fallen 30% since the beginning of the year to hover at US$100. A slowing Chinese economy, port destocking and rising supply all point to further downwards pressure. Indeed, just 1% of Chinese Still Mills are currently profitable. It’s a similar story for lithium, with miners now opting to delay future expansions and new supply.
Spodumene prices have fallen below US$760, a far cry from the all-time highs above US$8,000. At spot prices, few mines globally are profitable. The one metal bucking the trend is gold, which topped US$2,500 for the first.
The store of value has continued to climb to new highs on the back of countries such as China and Russia accumulating gold at the expense of US dollars and US Treasuries. The rally could also be a precursor for global economic weakness.
