August saw renewed appetite for risk assets despite heightened geopolitical tension. Global equity markets mostly rose with growth stocks and small caps outperforming, emerging market currencies moved largely higher, and credit spreads tightened. The US monthly jobs report was decent, showing that employers added 209,000 jobs in July, with the unemployment rate ticking up slightly to 6.2%. At the Kansas City Fed’s annual economic symposium in Jackson Hole, Fed Chair Yellen acknowledged that the job market has improved faster than expected, but continued to emphasize that the path of interest rates remains data dependent going forward; ECB President Draghi noted that inflation expectations in Europe had fallen, potentially laying the groundwork for a quantitative easing program, while BOJ Governor Kuroda gave a fairly upbeat assessment of Japan’s economy and indicated that the 2% inflation target could be hit during this fiscal year.
Global M&A activity continued apace in August. Notable deals announced included Scientific Games’ acquisition of Bally Technologies for $3.3 billion, Evercore Partners’ $400 million purchase of ISI Group, Telefonica’s $10 billion acquisition of Vivendi’s Brazilian telecommunications business, Northstar Realty’s acquisition of Griffin-American for $4 billion, Walgreen’s $15.3 billion purchase of Alliance Boots, Kinder Morgan’s consolidation of its various listed affiliates in a $70 billion deal, Infineon’s $3 billion acquisition of International Rectifier, Dynegy’s $2.8 billion deal for Duke Energy’s retail business and 11 power plants and $3.5 billion deal for Energy Capital Partners’ EquiPower Resources and Brayton Point Holdings, Roche’s $8.3 billion acquisition of InterMune, Oak Hill Capital’s $1.4 billion purchase of Berlin Packaging, Amazon’s $970 million acquisition of Twitch, and Burger King’s $11.4 billion purchase of Tim Hortons.
Developed market equity markets mostly rose in August (see page 7), as the S&P500 (+3.9%), France (+2.7%), and the UK (+2%) led gains; Japan (-1.2%) and Hong Kong (-0.9%) ended the month lower. US small caps outperformed, with the Russell 2000 up 5% (see page 4). Utilities (+5%), Health Care (+4.9%), and Consumer Staples (+4.7%) were the best performing US sectors, while Telecom (-1%), Energy (+2.2%) and Materials (+3.8%) were the worst performing (see page 2). Large cap growth (+4.6%) outperformed large cap value (+3.7%) in August (see page 3). Emerging Market equities were mostly higher in August (see page 8), with the biggest gains in Brazil (+9.7%), Thailand (+4.9%), and Mexico (+3.8%).
In currencies, the USD Index strengthened 1.6% in August (see page 9). The weakest developed market currencies against the USD were the Euro (-1.9%), the British Pound (-1.7%) and the New Zealand Dollar (-1.6%). The USD was mostly lower against emerging market currencies with the biggest gains in the Korean Won (+1.8%), Malaysian Ringgit (+1.5%), and the Brazilian Real (+1.1%); the Russian Ruble (-3.6%), Indonesian Rupiah (-1.1%) and Turkish Lira (-1%) weakened against the USD.
US Treasury yields fell across the curve in August (see page 11). 10 year rates closed the month at 2.34%, down from 2.56% at July month end. Investment grade and high yield credit spreads tightened in August (see page 12); European sovereign spreads held steady and US swap spreads widened (see page 13).
In commodities, the GSCI index fell 1.6% in August (see page 10), with gains in Industrial Metals (+0.8%) and losses in Livestock (-3.8%), Energy (-1.9%), Agriculture (-0.7%), and Precious Metals (-0.3%). Within individual commodities, Cotton led gains (+5.9%), followed by Natural Gas (+5.2%), Aluminum (+4.9%), and Palladium (+4%); Sugar (-5.9%), Soybeans (-5.3%), Lean Hogs (-4.9%), and Silver (-4.8%) weakened; Gold rose 0.4%.
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