Most risk assets continued to rally in August as economies around the world moved forward with reopening despite ongoing regional coronavirus outbreaks. Global equities moved mostly higher, with US large cap growth stocks once again leading the rally, the oil complex continued its rebound, the US dollar index weakened, the US yield curve steepened, and high yield credit spreads tightened; the Nasdaq index and the price of gold again reached all-time highs during the month. Fed Chairman Powell announced a major policy shift in August with “average inflation targeting”, meaning that the central bank will allow inflation to exceed its 2% target before raising interest rates, and in effect focusing more on the employment component of its dual mandate, particularly at lower income levels; it is noteworthy that the Fed has struggled to hit even the 2% inflation target since the end of the global financial crisis. US and Chinese August manufacturing PMI readings both held above 50, pointing to continued expansion, and non-manufacturing PMI rose to 54.8 and 55.2, respectively. The most recent initial US jobless claims report (for the week ended August 22) showed that weekly jobless claims totaled just above 1 million, while continuing claims fell to 14.5 million. The July US jobs report showed that 1.8 million jobs were added during the month, the unemployment rate fell to 10.2% (from 11.1%), the labor force participation rate slipped to 61.4%, average hourly earnings increased 4.8%, and the total labor force held at 159.9 million, of which 143.5 million were employed.
Developed market equities moved higher in August (see page 8), with the largest gains in Japan (+7.9%), Hong Kong (+7.9%), and the S&P 500 (+7.1%). US large caps outperformed small caps, with the Russell 2000 up 5.6%, and the Russell 1000 up 7.3% (see page 3). The best performing S&P 500 sectors in August were IT (+12%), Consumer Discretionary (+9.5%), and Communication Services (+9.1%), and the worst performing were Utilities (-2.6%), Energy (-1%), and Real Estate (0%). Large cap growth (+10.3%) outperformed large cap value (+4.1%) in August (see page 3). Emerging market equities were mixed (see page 9), with the biggest gains in China (+5.4%), Indonesia (+2.3%), and India (+1.8%), and the biggest losses in Malaysia (-5.4%), Brazil (-4%), and Thailand (-2.4%).
In currencies, the USD Index weakened in August (see page 10), with the Norwegian Krone (+4.2%), Australian Dollar (+3.3%), and Canadian Dollar (+2.8%) posting the biggest gains against the USD. Emerging market currencies were mixed against the USD, with the biggest gains in the Chinese Yuan (+2%), Indian Rupee (+2%), and Mexican Peso (+1.8%), and the biggest losses in the Turkish Lira (-5.1%), Brazilian Real (-5%), and Taiwan Dollar (-0.1%).
The US interest rate curve steepened in August (see page 12). 10 year rates closed the month at 0.70%, from 0.53% at July month end. US investment grade and high yield spreads tightened (see page 13).
In commodities, the GSCI index increased (+4.6%) in August (see page 11), with gains in Agriculture (+5.5%), Energy (+5.4%), Industrial Metals (+5.2%), and Precious Metals (+1.3%) while Livestock moved lower (-0.5%). Within individual commodities, Natural Gas (+37.4%), Silver (+17.2%), and Cocoa (+11.1%) saw the biggest gains, while Feeder Cattle (-4.6%), Live Cattle (-2.4%), and Heating Oil (-2.3%) saw the biggest losses. Gold was down 0.4% in August..
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