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4. September 2015 16:22
by Irene
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August Market Commentary

4. September 2015 16:22 by Irene | 0 Comments

August should have been a quiet months, but despite some sun there was no calm in the markets. Having finally moved past the Greek odyssey, a debt-fuelled Chinese stock market together with plummeting commodity prices kept investors panicking. The Chinese government tried to prop up markets for a while, but didn’t really succeed – although the downturn could have gone much further. Global equities finished the month between 6% and 22% down.

China

Chinese equities finally erased all the gains for the year in late August, dropping the most since 2007. This comes despite Chinese policymakers’ efforts to stimulate the economy through expansionary monetary policy and a devaluation of the Yuan currency. Having returned more than 100% in less than a year, Chinese equities had been in bubble mode and that bubble needed to burst. The problem is that a lot of the buying has been built around leverage, which is much harder to unwind and mostly does not happen without some tears. The cool breeze from China could be felt all over the world. As the CSI Index is still up 43% over the last year, the drop could go further.

Emerging Markets

Besides leverage, there is another factor to watch for China, which is its reserves. The People’s Bank of China has been offloading Treasuries and buying Yuan to support the exchange rate. It is estimated that this policy has contributed to a $315bn drop in China’s foreign-exchange reserves over the last year (from a level of around $3.99tr in 2014). The sales of US Treasuries has the same quantitative tightening effect as the US rate rise. Many of the Emerging Markets countries followed China downwards. The worst performing countries after China were Malaysia and Brazil, in both cases more fuelled by politics. The MSCI Emerging Markets Index is down 9% for August and 14.7% for the year.

Europe

Over in Europe, Germany had one of the worst months ever in August with a fall of 9.3% in the DAX. The main losers were automakers due to the decrease in car sales in China. But not all is doom and gloom in the markets and the slump seemed a slight overreaction. The economy for Germany looks positive, with retail sales, business confidence and factory orders up. There is of course the question how much a Chinese slowdown will impact the export-driven German economy, but the manufacturing sector expanded at its fastest pace in more than a year. Unemployment figures for the Eurozone in general were slightly down. Spain’s and Italy’s economy are doing better, but France is in stagnation. Greece is expecting its third election for this year at the end of September with a close call on whether Syriza will win again. UK growth picked up pace in the three months to August but similar to Germany, the economy faces risks from the knock-on effect of turbulence in China. Talk about a rate hike in the UK has more or less subsided and Sterling was down 3.9% against the Euro and 1.8% against the Dollar as a result of it.

US

In the US, all eyes are yet again on the Fed. Economic data was mainly positive with US productivity rising 3.3% in the second quarter, employment up and the PMI manufacturing index above 50, at 51.1, but lower than the last few months. With the pending Fed rate rise, bad news in the US sometimes seems to be good news for equities and good news bad, as there has been lots of discussion of ‘will they or won’t they’ for a September rate hike.

Fixed Income

Fixed Income took a different stance in August. With equity markets tumbling, governments bonds were up mid-month, but US and UK rates finished more or less flat at the end of the month with the risk of a rate hike pending. Corporate and high yield bonds were down slightly on both sides of the Atlantic. Emerging markets bonds, similar to their equity counterparts, did not fare well.

Market Returns Overview



Source: Markit, Twenty20 Investments, as of 31 Aug 2015, all returns in GBP.

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