Global share markets fell in August as bond yields plunged after additional tit for tat tariffs between the US and China were announced and China allowed its currency to fall through a key threshold. This escalation in the trade war increased concern about its impact on global economic growth.
During the month the US yield curve inverted again. This means that it is cheaper for the government to borrow money, or sell bonds, over ten-years than it is on a shorter basis. Investors typically require a higher return to lend money (buy bonds) for longer periods. An inverted yield curve suggests a lack of confidence in the near-term prospects of the economy and is perceived by many as a harbinger of recession. Notwithstanding the length of this economic cycle we are not convinced a recession in the US is imminent as the US consumer remains in good health and consumer spending makes up some 2/3rd's of the US economy. In addition it is typically a rising short end of the curve which slows an economy. This time the major recent move has been a lowering in the long end of the US Treasury curve as investors who face negative interest rates in their home country opt for positive
yielding long-dated US Treasuries instead.
US share market losses were led lower by the energy sector with oil prices falling to their lowest levels in 6 weeks amid growing concerns that US-China tensions would weaken demand for crude oil. The S&P 500 ended the month -1.6% lower.
European share markets were slightly lower in August as lingering issues continued to weigh on investor sentiment. The aforementioned trade war escalation weighed on stocks but they recovered the majority of this by month end after better than anticipated Eurozone economic data and some softening in Trump's trade war rhetoric.
Given the German economy's dependence on exports it has been hit heavily by a slowdown in China’s economy. Some high profile German economists have recently called for a loosening of the Government's purse strings to combat the moribund economy. This appears to be working with the German Finance Minister exploring fiscal measures to boost the economy.
Asian equity markets ended August significantly lower. Hong Kong was the worst performing market with the Hang Seng Index falling -7.4% over the month as investors sold shares due to the ongoing violent protests and also as US/China trade war concerns intensified.
Unsurprisingly, Chinese equities also did it tough with the Shanghai Composite Exchange falling -1.5%. A raft of economic data was released in August with the broad picture being that of continued softening in the Chinese economy.
Emerging share markets performed poorly overall as fears of a global economic slowdown increased. In these "risk-off" environments riskier assets such as emerging markets' stocks tend to perform poorly whilst ‘safe haven’ assets such as government bonds and precious metals tend to outperform.
Over the ditch and - geopolitics aside - the focus in August was on the corporate earnings season. One word sums up the overall tone of earnings releases - 'lacklustre.' If BHP and Wesfarmers were excluded from the analysis (due to their abnormal increase in profits e.g. Wesfarmers profits rose 360%) then overall earnings only increased 1.2%.
A similar theme prevailed in the NZ earnings season whereby low expectations were largely met and a number of companies provided cautious outlooks. Although the NZX50G followed global markets lower, once again it outperformed all the major indices we closely monitor. A big factor for this outperformance was the RBNZ cutting interest rates by 50 basis points from 1.50% to 1.00% on August 7. Westpac chief economist Dominick Stephens had the following to say about the RBNZ move: "This was a stunning decision… In the history of the OCR, the only times the OCR has been cut by 50bps or more have been after the 9/11 terrorist attack, during the GFC, and after the Christchurch earthquake.” Clearly the RBNZ is wanting to front-foot this slow down. The lower interest rates have helped drive the NZ dollar (NZD) lower which has been a bonus from the RBNZ’s point of view. First a lower NZD increases
inflation by making imported goods more expensive. This helps the RBNZ move towards its inflation target. Second it helps with the RBNZ’s employment mandate as a lower NZD makes the country’s exports more internationally competitive. More exports creates more jobs.