The month of August saw strong returns across the board in global equity markets, with the ASX200 gaining around +2.4%, S&P500 +2.9% and the Nikkei225 in Japan the most notable with a +3.1% rise. European equity indices and Emerging markets also lifted around +2.2%, respectively (all quoted in AUD terms).
The Aussie dollar experienced some mild volatility in August, trading down to around 0.71 vs the USD late in the month, mainly on the back of swings in the iron ore price and chatter that the RBA would postpone the tapering of its bond-buying program. Interestingly, it ended the month flat, closing around the 0.73 level after seeing strength in other commodity prices and the RBA confirming they would not change course.Iron ore futures fell sharply in the month, giving up around -20% from the opening month highs. Ongoing concerns around the Chinese economy slowing, industrial production target cuts and seasonal factors are all to blame for the pullback in iron ore prices. Iron ore ended the month around $152 USD/tonne after trading as high as $220 USD/tonne in July.
The Australian second-quarter GDP numbers surprised to the upside, coming in at +0.7% (Q/Q) as growth continued to be supported by domestic spending and government fiscal policies. The restrictions in place in NSW only impacted the last few weeks of the quarter and will have more of an impact in Q3, with a large contraction expected.
August 2021 Summary:
- The US Federal Reserve has reiterated the importance of a long-term 2% inflation target
- Major US equity bourses posted fresh all-time highs in August
- US large-cap stocks outperformed small-cap stocks
- Growth stocks outpaced Value stocks in the large-cap sector but were the opposite in the small-cap sector, with Value outperforming Growth
- Oil prices fell sharply in August, giving back over -7% in the WTI futures
- The US unemployment rate continued to fall in August and currently sits at 5.4%
US Equity Markets:
US equity indices posted fresh highs in August, snapping the trend where August is one of the worst-performing months for equity markets seasonally. The S&P500 has now gained seven straight months, which is the index's longest positive streak since early 2018. Market participants highlighted that the concerns around inflation, the spread of the Delta variant, labour market shortages and supply-chain issues were not enough to keep a lid on things.
US Fed:
The US Federal Reserve Chair, Jerome Powell, gave equities a boost by making some dovish comments while speaking at the Jackson Hole symposium in the last week of August. He emphasised that the FOMC remains steadfast in their commitment to support the economy for as long as needed to achieve a full recovery. Also noting that tapering on the Fed's QE program could begin by the end of the year if substantial further economic progress is seen. With the US unemployment rate sitting at 5.4%, some economists expect to see the rate dip further when the August Non-farm Payrolls data is released in a few weeks. The benchmark US10Y Treasury yield increased during the month, closing around 1.29%. Still, far from the highs seen in March this year when the benchmark yield sat around 1.70%.
US Corporate Earnings:
US corporate earnings jumped higher in the second quarter, simultaneously with the S&P500, Dow Jones, and Nasdaq trading to all-time highs. Over 97% of the companies within the S&P500 reported earnings growth of 88%, which was well above the consensus estimates of 63% at the start of the quarter. 89% of companies beat both earnings and sales market estimates, which was much higher than the 65% 5-year average for sales and 74% average for earnings per share in the index. Although analysts expected to see a significant upside in growth, when compared to 2020's COVID-influenced data, the surprisingly positive data has supported equity prices as analysts have revised future earnings estimates even higher.
Copper Prices:
Copper futures saw increased volatility during August, trading down close the -15% at one point during the month. The base metal managed to find some support, rallying back to close the month down only -3%. Copper has fallen close to 9% since the highs seen in May this year, mainly due to weaker economic data from China.
Price of Oil:
WTI Crude was also hard done by, losing around -7.4% in August, which is the biggest monthly decline since October last year. Unsurprisingly, energy stocks were down in the month and were the only sector to have a negative performance with concerns around the Chinese economy, a global impact of the Delta variant, and tapering fears in the US all said to be behind the sentiment.
The US Dollar:
The US Dollar Index (DXY) traded higher early in the month, reaching a high of 93.74 only to finish essentially flat by month-end up +0.51%. The retreat from the highs can be attributed to fears around tapering subsiding, which typically points to a stronger USD as the US economy recovers and scales back the QE program.
Bitcoin:
Following on from some decent strength in July, Bitcoin continued to surge in August, closing the month up around +14%. Technical analysts are eyeing the $50,000 psychological level as the next price target and potential support in the cryptocurrency, which has previously been a pivotal price level.
Looking ahead:
The timing around the US Fed's tapering intentions will be a crucial driver of market volatility in the months to come, with Fed watchers pointing to the next FOMC meeting on September 22 as a potential catalyst. Concerns remain around the continuing spread of the Delta variant and inflation around the globe as economies begin to heat up, and both these factors could weigh on markets in the months to come.