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August Market Update: recovery continues, but delta variant remains a risk

For financial professionals only

In a nutshell:

  • The economy continues its steady recovery despite Delta variant concerns and geopolitical risks
  • Major central banks maintain accommodative monetary policy
  • Risks remain with Covid and inflationary pressures

What’s moving markets…

Recent market trends continued in August, with Central Bank policy the main area of investor focus.

The month’s data was largely positive, with strong employment and GDP figures in the UK and US, but the delta variant still presented risk to economic recovery. Curiously, the new variant may have kept markets buoyant, as investors felt the Fed would be more likely to maintain its monetary support for longer.

Indeed, at the Jackson Hole Symposium on 27th August, Fed Chair Jerome Powell said they will maintain their bond purchasing for the time being, and did not signal any immediate change in interest rate policy. However, it was noted that if the underlying data continues to meet the Fed’s targets, it may be appropriate to begin ‘cautiously’ tapering later this year.

Also in the US, the $1 trillion infrastructure bill was passed by the Senate, allowing for investment into new roads, rail and airports. This is in addition to the $3.5 trillion due to be invested in social and climate programmes. While positive for employment and the transition to net zero, these government spending levels raise the likelihood of future increased inflation pressures.

In the UK, the Bank of England kept the base rate at 0.1% to maintain economic recovery, even with headline inflation coming in above target. They believe current inflation levels are due to temporary factors, and although CPI is forecast to peak at 4% later this year before falling again in early 2022, is unlikely to persist. So they don’t expect to raise rates this year. The Bank of England also maintained their QE programme, but suggested they’ll begin to reduce their bond purchases soon.

In Europe, the recovery continued with GDP and PMI data still expansionary, although they remain behind the UK and US having reopened their economy later. Therefore, the ECB has not signalled any changes in policy.

In Emerging Markets, the slowdown and regulatory changes in China continued to impact various industries, which has affected equity valuations. The Delta variant is also more concerning given the lower vaccination rates across the developing world.

Asset class implications…

In Fixed Income, markets remained relatively steady. The supportive outlook from the Fed and other central banks eased concerns of any unexpected rate rises. Therefore, yields remained low, with no signs of a ‘taper tantrum’ yet. Inflation-linked bonds ticked up in value, as investors priced in higher long-term inflation expectations and Global bonds had a positive return. Meanwhile, UK Gilts were marginally lower over the month as yields slightly increased.

Most major equity markets rose in August, with the US and European indices reaching all-time highs on the back of strong economic and earnings data. Japan’s strong month was boosted further by prime minister Yoshihide Suga’s resignation announcement.

Asia Pacific ex Japan and Emerging Markets both posted positive returns, despite an uneven recovery from Covid and increasing regulatory pressures in China. The FTSE Emerging index was the leading performer, largely driven by outperformance in India and South East Asia, due to the steady continuation of the global recovery.

Chinese equities were broadly flat in August, with data suggesting a slowdown and regulatory pressures continuing to impact various sectors. The recent volatility in China highlights the added risks of investing in Emerging Markets. While there’s potential for higher growth, they can also carry the extra political and regulatory risks.

Asset classes in numbers

Name 1m 3m YTD 1yr 3yr
FTSE Actuaries UK Conventional Gilts All Stocks TR in GB -0.82 2.67 -3.85 -1.81 11.69
ICE BofA Global Broad Market Hedge GBP TR in GB 0.57 3.52 -3.33 -3.09 7.38
IA UK Direct Property TR in GB 0.72 2.34 3.65 3.57 0.50
FTSE All Share TR in GB 2.67 3.38 14.66 26.95 11.37
FTSE USA TR in GB 3.91 11.50 19.75 27.17 55.21
FTSE World Europe ex UK GTR in GB 2.82 6.35 15.87 27.38 34.46
FTSE Japan TR in GB 4.01 4.71 2.58 16.68 16.79
FTSE Asia Pacific ex Japan TR in GB 3.33 -1.27 2.26 17.01 27.68
FTSE Emerging TR in GB 4.38 -0.37 3.58 16.97 27.01

Source: FE Analytics, GBP total return (%) to last month end